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Full text of "S. 1822, the Communications Act of 1994 ; hearings before the Committee on Commerce, Science, and Transportation, United States Senate, One Hundred Third Congress, second session, February 23, March 2 and 17, and May 4, 11, 12, 18, 24, and 25, 1994"

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S. Hrg. 103-599 



S. 1822, THE COMMUNICATIONS ACT OF 1994 



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is. 1822; The Connunicatiois Act of... 




HEARING 

BEFORE THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 

SECOND SESSION 



FEBRUARY 23, MARCH 2 AND 17, AND MAY 4, 11, 12, 18, 24, 

AND 25, 1994 



Printed for the use of the Committee on Commerce, Science, and Transportation 





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,^WiiBUGaB8ARv 



S. Hrg. 103-599 

S. 1822, THE COMMUNICATIONS ACT OF 1994 



HEARINGS 

BEFORE THE 

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRD CONGRESS 
SECOND SESSION 



FEBRUARY 23, MARCH 2 AND 17, AND MAY 4, 11, 12, 18, 24, 

AND 25, 1994 



Printed for the use of the Committee on Commerce, Science, and Transportation 




U.S. GOVERNMENT PRINTING OFFICE 
76-775 CC WASHINGTON : 1994 

For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-044572-8 



COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 
ERNEST F. HOLLINGS, South Carolina, Chairman 



DANIEL K. INOUYE, Hawaii 

WENDELL H. FORD, Kentucky 

J. JAMES EXON, Nebraska 

JOHN D. ROCKEFELLER IV, West Vir^nia 

JOHN F. KERRY, Massachusetta 

JOHN B. BREAUX, Louisiana 

RICHARD H. BRYAN, Nevada 

CHARLES S. ROBB, Virginia 

BYRON L. DORGAN, North Dakota 



JOHN C. DANFORTH, Missouri 
BOB PACKWOOD, Oregon 
LARRY PRESSLER, South Dakota 
TED STEVENS, Alaska 
JOHN McCain, Arizona 
CONRAD BURNS, Montana 
SLADE GORTON, Washington 
TRENT LOTT, Mississippi 
KAY BAILEY HUTCHISON, Texas 



HARLAN MATHEWS, Tennessee 

Kevin G. Cuhtin, Chief Counsel and Staff Director 
Jonathan Chambers, Republican Staff Director 



(II) 



CONTENTS 



February 23, 1994 

Page 

Opening statement of Senator Breaux 6 

Opening statement of Senator Bums 4 

Prepared statement 4 

Opening statement of Senator Danforth 2 

Opening statement of Senator Exon 2 

Opening statement of Senator Hollings 1 

Prepared statement 1 

Opening statement of Senator Packwood 7 

Opening statement of Senator Pressler 8 

Prepared statement 9 

Opening statement of Senator Stevens 7 

Prepared statement of Senator Inouye 3 

Prepared statement of Senator McCain 10 

UST OF WITNESSES 

Brown, Hon. Ronald H., Secretary, Department of Commerce 10 

Prepared statement 14 

Hundt, Hon. Reed E., Chairman, Federal Communications Commission 52 

Prepared statement 56 

Miller, Dean J., Commissioner, Idaho Public Utilities Commission 93 

Prepared statement 93 

Squadron, William F., President, National Association of Telecommunications 

Officers and Advisors 102 

Prepared statement 104 

APPENDIX 

Dorgan, Senator, prepared statement of 744 

Fukunaga, State Senator Carol, Hawaii, on behalf of the National Conference 

of State Legislatures, prepared statement of 737 

Hawaiian Department of" Budget and Finance, prepared statement of the 736 

Kerrey, Senator, prepared statement of 741 

McCain, Senator, prepared statement of 741 

Naito, Yukio, Chairman, Hawaiian Public Utilities Commission, Department 
of Budget and Finance, letter from, to Senator Inouye, dated February 

23, 1994 731 

Questions asked by Senator Pressler and answers thereto by: 

Mr. Miller 729 

Secretary Brown 739 

Totto, Charles W., Executive Director, Hawaiian Division of Consumer Advo- 
cacy, Department of Commerce and Consumer Affairs, letter from, to Sen- 
ator Inouye, dated February 11, 1994 732 

University of Hawaii and the Hawaiian Department of Education, prepared 

statement of the 737 

March 2, 1994 

Opening statement of Senator Hollings 109 

Prepared statement 109 

Opening statement of Senator Packwood 110 

Prepared statement of Senator Bums Ill 

(III) 



IV 

Page 
UST OF WITNESSES 

Bennack, Frank, Jr., President and Chief Executive Officer, the Hearst Corp . 114 

Prepared statement 117 

Carter, David, President, Central Station Alarm Association 127 

Prepared statement 129 

Cullen, James G., President, Bell Atlantic Corp Ill 

Prepared statement 113 

Fishman, R. Jack, President, Lakeway Publishers, Inc 130 

Prepared statement 133 

Lynn, John B., Telecommunications Counsel, EDS Corp 121 

F*repared statement 123 

Weis, Hon. Sandra, Director, Government Affairs, FVodigy Services Co 136 

Prepared statement 137 

APPENDIX 

Bums, Senator, prepared statement of 746 

Hutchison, Senator, prepared statement of 745 

Robb, Senator, prepared statement of 745 

March 17, 1994 

Opening statement of Senator Bums 203 

Prepared statement 204 

Opening statement of Senator Danforth 169 

Opening statement of Senator Packwood 168 

Opening statement of Senator Pressler 164 

Opening statement of Senator Robb 163 

Prepared statement of Senator Hollings 256 

UST OF WITNESSES 

Bhatia, Salim A.L., P*resident and Chief Executive Officer, BroadBand Tech- 
nologies, Inc 179 

Prepared statement 182 

Loewen, Ron, Vice President/CJeneral Manager, Cosmos Broadcasting Corp., 

WIS-TV 218 

Prepared statement 220 

Major, John, Chairman, Telecommunications Industry Association (TLA), Sen- 
ior Vice President and Director, Spectrum, Standards, and Software Man- 
agement, Motorola, Inc 185 

Prepared statement 188 

McCormick, Richard D., Chairman and Chief Executive Officer, US West, 

Inc 170 

F*repared statement 172 

McKinnon, Jack, Transmission Systems Vice President, AT&T 173 

Prepared statement 175 

Rast, Robert M., Vice President, HDTV Business Development, G.I. Commu- 
nications Division, General Instrument Corp 243 

Prepared statement 244 

Schwartzman, Andrew Jay, Executive Director, Media Access Project 248 

Prepared statement 253 

Siegel, John, Senior Vice President, Chris-CraftAJnited Television 238 

Prepared statement 220 

Stroup, Thomas A., President, Personal Communications Industry Association 

(PCHA) 240 

Prepared statement 241 

APPENDIX 

Questions asked by Senator Hollings and Senator Packwood and answers 

thereto by Mr. Kantor 746 

Capital Cities/ABC, Inc., prepared statement of 749 

Inouye, Senator, prepared statement of 751 

May 4, 1994 

Opening statement of Senator Bums 260 



V 

Page 

Opening statement of Senator Exon 261 

Opening statement of Senator HoUings 259 

Opening statement of Senator Hutchison 260 

Opening statement of Senator Stevens 261 

Prepared statement of Senator Pressler 332 

UST OF WITNESSES 

Anstrom, Decker, President and Chief Executive Officer, National Cable Tele- 
vision Association 262 

Prepared statement 263 

Chester, Jeffrey, Executive Director, Center for Media Education 293 

Prepared statement 294 

D'Antonio, Richard, President, Bentleyville Telephone Co 288 

Prepared statement 290 

Fritts, Edward O., President and CEO, National Association of Broadcasters .. 304 

Prepared statement 306 

Halstead, Donna, Council Member, City of Dallas, TX 282 

Prepared statement 284 

McCormick, Richard D., President and Chief Executive Officer, U.S. West, 

Inc 298 

Prepared statement 300 

APPENDIX 

Frink, Gary, President, Television Viewers of America, prepared statement 

of 751 

Questions asked by Senator Lott and answers thereto by Mr. Anstrom 754 

May 11, 1994 

Opening statement of Senator Hollings 341 

Opening statement of Senator Kerry 342 

Opening statement of Senator Lott 342 

Opening statement of Senator Pressler 342 

Prepared statement 381 

Prepared statement of Senator Riegle 344 

UST OF WITNESSES 

DeNicola, Paul, President and CEO, Southern Company Services, Inc 369 

Prepared statement 371 

Gressette, Lawrence M., Jr., Chairman, President, and Chief Executive Ofli- 

cer, SCANA Corp 360 

Prepared statement 363 

Hogerty, Martha, Public Counsel, Missouri Office of Public Counsel, Presi- 
dent, National Association of State Utilities Consumer Advocates 345 

Prepared statement 348 

Ray, William, General Manager, Glasgow Electric Plant Board 351 

Prepared statement 353 

APPENDIX 

Coalition for PUHCA, prepared statement of the 761 

National Association of Regulatory Utility Commissioners, prepared state- 
ment of the 764 

National Cable Television Association, prepared statement of the 756 

Riegle, Senator Donald W., Jr., Chairman, Committee on Banking, Housing, 

and Urban Affairs, letter from, dated June 7, 1994 756 

United States Telephone Association, prepared statement of the 758 

May 12, 1994 

Opening statement of Senator Breaux 400 

Opening statement of Senator Hollings 397 

Opening statement of Senator Inouye 399 

Opening statement of Senator Packwood 402 

Opening statement of Senator Stevens 405 

Prepared statement of Senator Hutchison 398 



VI 

Page 

F*repared statement of Senator Pressler 405 

Prepared statement of Senator Rockefeller 405 

UST OF WIT^fESSES 

Allen, Robert E., Chairman and Chief Executive Officer, AT&T 407 

Prepared statement 409 

Cullen, Jsunes G., President, Bell Atlantic Corp 418 

Prepared statement 419 

Ebbers, Bernard J., Chairman, Competitive Telecommunications Association 

and President, LDDSMetromedia Communications 449 

Prepared statement 451 

Esrey, William T., Chairman and Chief Executive Officer, Sprint Corp 443 

Prepared statement 444 

Kane, John, President, America's Carriers Telecommunication Association 

and Senior Vice President, Operation, WCT Communications, Inc 459 

Prepared statement 460 

Neel, Roy, President and Chief Executive Officer, United States Telephone 

Association 454 

Prepared statement 456 

Roberts, Bert C, Jr., Chairman and Chief Executive Officer, MCI Commu- 
nications Corp 421 

Prepared statement 423 

APPENDIX 

Former Cabinet Official Supports Rollings Telecommunications Bill, Says 
It Would Create Thousands of New Jobs, Billions of Dollars of Economic 

Output (press release), dated May 11, 1994 768 

Inouye, Senator, prepared statement of 768 

McGann, Albert J., Executive Director, Competitive Long Distance Coalition, 

Inc., letter from, to Senator Inouye, dated May 17, 1994 767 

O'Neal, John F., General Counsel, NRTA; Michael E. Brunner, Executive 
Vice President, NTCA; and John N. Rose, Executive Vice President, 

OPASTCO, joint letter from, to Senator Hollings, dated May 11, 1994 766 

May 18, 1994 

Opening statement of Senator Hollings 489 

Prepared statement 489 

Prepared statement of Senator Stevens 523 

UST OF WITNESSES 

Cooper, Mark, Director of Research, Consumer Federation of America 549 

Prepared statement 551 

Cullen, James G., President, Bell Atlantic Corp 566 

Prepared statement 568 

Green, Richard C, Jr., Chairman and President, UtiliCorp United 490 

Prepared statement 492 

Hamlen, Steven, President, United Utilities, Inc 502 

Prepared statement 504 

Hilsabeck, Frank, President and Chief Executive Officer, Lincoln Telephone ... 495 

Prepared statement 497 

Humphrey, Margot Smiley, Attorney, National Rural Telecom Association 559 

Prepared statement 561 

Lasher, Gary E., President and Chief Executive Officer, Eastern TeleLogic, 

Inc 576 

Prepared statement 578 

Neel, Roy, President and Chief Executive Officer, United States Telephone 

Association 543 

Prepared statement 545 

Noam, Prof. Eli, Columbia Business School and Director, Columbia Institute 

for Teleinformation 501 

Roberts, Brian L., Chairman, Comcast Corp 518 

Prepared statement 520 



VII 

Page 

Rosenblum, Hon. Lisa, Deputy Chairman, New York Public Service Commis- 
sion 510 

Prepared statement 512 

Tindall, Ms. Dana, Senior Vice President, Legal and Regulatory Affairs, Gen- 
eral Communications, Inc 506 

Prepared statement 508 

Wheeler, Thomas E., President and Chief Executive Officer, Cellular Tele- 
communications Industry Association 570 

Prepared statement 571 

APPENDIX 

Bums, Senator, letter from, to Senator Rollings, dated June 8, 1994 774 

Cohen, Dr. Robert B., Senior Fellow, Economic Strategy Institute, prepared 

statement of 775 

Dorgan, Senator, prepared statement of 788 

Higa, Clifford K., Director, Hawaii Department of Commerce and Consumer 

Affairs, letter from, to Senator Inouye, dated April 8, 1994 783 

Inouye, Senator, prepared statement of 770 

Noam, Eli M., Professor of Finance and Economics, Graduate School of Busi- 
ness, Columbia University, prepared statement of 771 

Pressler, Senator, prepared statement of 787 

Roberts, Brian L., President, Comcast Corp., letter from, to Senator Gorton, 

dated June 2, 1994 787 

Wohlbruck, Aliceann, Executive Director, National Association of Develop- 
ment Organizations, prepared statement of 779 

May 24, 1994 

Opening statement of Senator Hollings 597 

Prepared statement 597 

UST OF WITNESSES 

Goldfarb, Mark L., Director, International Center for Deafness, Gallaudet 

University 613 

Prepared statement 615 

Hadden, Dr. Susan, Chairman, Policy Committee, Alliance for Public Tech- 
nology 632 

Prepared statement 634 

Peck, Robert, Legislative Counsel, American Civil Liberties Union 617 

Prepared statement 619 

Pfanstiehl, Dr. Margaret R., Founder and President, Metropolitan Washing- 
ton Ear 602 

Pharr, Anthony L., Legal Counsel, Office of Communication, United Church 

of Christ 624 

Prepared statement 627 

Schroeder, Paul W., Director of Governmental Affairs, American Council of 

the Blind 604 

Prepared statement 607 

Winston, James L., National Association of Black Owned Broadcasters, Inc .... 598 

Prepared statement 600 



APPENDIX 



Evans, Donald J., Esq., and Nancy L. Killien, Esq., McFadden, Evans & 

Sill, joint letter from, to Representative Moorhead, aated March 21, 1994 .... 

Gay, William S., President, National Emergency Number Association, pre- 



pared statement of : 804 

Love, James, Director, Taxpayer Assets Project, letter from, to Senator Hol- 
lings, dated June 10, 1994 809 

Maines, Patrick D., President, the Media Institute, letters from, to Represent- 
ative Richardson, dated March 11, 1994; and to Representative Moorhead, 

dated May 20, 1994 790,794 

Pfanstiehl, Margaret Rockkwell, Ed.D., President, Metropolitan Washington, 

Ear, Inc., letter from, to the committee 808 



VIII 

Page 
Pharr, Anthony L., Legal Counsel, Office of Communication, Church of Christ, 
letters from, to Mary McManus, and to John Windhausen, dated June 

6, 1994 797,799 

Pressler, Senator, prepared statements of 801 

Questions asked by Senator Bums and answers thereto by: 

Mr. Goldfarb 803 

Mr. Schroeder 801 

Ms. Hadden 799 

Ms. Pfanstiehl 808 

Richmond, Grordon, Executive Director, Hear Our Voices! prepared statement 

of 805 

Schroeder, Paul, Director of Governmental AlTairs, American Council of the 
Blind, and Scott Marshall, Association Executive Director, American Foun- 
dation for the Blind, joint letter from, to Senator HoUings and Senator 

Danforth, dated June 2, 1994 802 

Sonnenstrahl, Alfred, Chair, Telecommunications Committee, Consumer Ac- 
tion Network, prepared statement of 797 

StovaU, Jim, President, Narrative Television Network, prepared statement 

of 803 

May 25, 1994 

Opening statement of Senator Bums 671 

Prepared statement 673 

Opening statement of Senator Exon 659 

Opening statement of Senator HoUings 659 

Prepared statement 659 

Opening statement of Senator Robb 674 

UST OF WITNESSES 

Albright, Elaine, Chair, Ad Hoc Subcommittee on Telecommunications, Amer- 
ican Library Association 713 

Prepared statement 715 

Duggan, Ervin S., President, Public Broadcasting Service 703 

Prepared statement 705 

Kerrey, Hon. J. Robert, U.S. Senator from Nebrasks 679 

Prepared statement 685 

Lane, Carla, Ph.D., Representative, U.S. Distance Learning Association 724 

Melley, Kenneth F., Assistant Executive Director, Center for Public Affairs, 

National Education Association 709 

Prepared statement 711 

Riley, Hon. Richard W., Secretary of Education, Department of Education 660 

Prepared statement 663 

Vedoe, Cheryl, Vice President and General Manager, Education Division, 

Apple Computer 695 

Prepared statement 695 

APPENDIX 

Bybee, Dennis L., Ph.D., Secretary, National Coordinating Committee and 
FORUM on Technology in Education and Training, letter from, to Senator 

HoUings, dated May 19, 1994 812 

Inouye, Senator, prepared statement of 816 

Kerrey, Senator, prepared statement of 813 

MATHLINE 812 

National School Boards Association, prepared statement of the 810 

Richardson, Bruce A., Ed.D., Deputy Commissioner, Vermont Department 

of Education, prepared statement oi 816 



S. 1822, THE COMMUNICATIONS ACT OF 1994 



WEDNESDAY, FEBRUARY 23, 1994 

U.S. Senate, 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 

The committee met, pursuant to notice, at 9:40 a.m. in room SR- 
253, Russell Senate Office Building, Hon. Ernest F. Rollings (chair- 
man of the committee) presiding. 

Staff members assigned to tnis hearing: John D. Windhausen, 
Jr., senior counsel, and Kevin M. Joseph, professional staff mem- 
ber; and Regina M. Keeney, minority senior counsel, and Mary P. 
McManus, minority staff counsel. 

OPENING STATEMENT OF SENATOR ROLLINGS 

The Chairman. The committee will come to order. I have an 
opening statement that will be included in the record. 
[The prepared statement of Senator Rollings follows:] 

Prepared Statement of Senator Hollings 

This morning we begin the first of several hearings on S. 1822, the Communica- 
tions Act of 1994. This legislation has a total of 13 cosponsors from both sides of 
the aisle, 12 of whom are on the committee. I express my particular appreciation 
to Senators Inouye and Danforth, who began the process of considering comprehen- 
sive legislation in the committee last year. 

S. 1822 includes the most comprehensive revisions to the Communications Act 
since the act was originally passed in 1934. This is an attempt to bring order out 
of chaos. The primary objectives of the legislation are to safeguard the public inter- 
est while permitting the growth and development of new communications tech- 
nologies that may provide significant consumer benefits. The bill eliminates several 
antiquated provisions of the Communications Act, adds other provisions, and 
amends existing provisions to provide a unified regulatory framework capable of 
protecting the public interest, convenience, and necessity well into the next century. 

Communications are playing a greater role in our everyday lives. Portable tele- 
phones, fax machines, voice mail, and videoconferencing are all services that did not 
exist 10 years ago. Revenues from communications services now totaJ over $185 bil- 
lion per year. Communications firms are merging and divesting, growing larger and 
cutting costs. 

While the pace of activity in the market is frenetic, the interests of the consumer 
are in danger of becoming lost in the shuffle. Policymakers must make certain to 
ensure that we are not distracted from our goal oi protecting the public interest. 
As we consider new legislation and regulatory changes, certain goals are para- 
mount. 

Universal telephone services must be preserved and enhanced. Plain old telephone 
service is no longer adequate; consumers, health care specialists, students, and dis- 
abled persons want higher capacity bandwidth delivered to their homes and offices. 

Diversity of ownership must be a primary goal. As we become more dependent 
on communications services for our iniormation and entertainment, it becomes espe- 
cially important that we receive information from a variety of sources. Allowing a 
single media conglomerate to manage our information sources could be as dangerous 
to the public interest as allowing the Government to exercise that control. 

(1) 



We must seek to regulate all providers of communications services in a similar 
manner. The current law regulates some providers of telecommunications services 
differently from other providers. The result is unfair to competitors and harmful to 
consumers. 

Users of communications services must be given control over information concern- 
ing their use of those services. Consumers should not lose their right to privacy sim- 
ply because they pick up the telephone. 

Hospitals, schools, State, and local government offices, public broadcasters, and 
other public entities must receive access to the national information superhighway 
at preferential rates. 

I am pleased that so many of my colleagues share these concerns and have joined 
in cosponsoring this legislation. I look forward to woricing with them and the admin- 
istration toward the goal of enacting this legislation in this Congress. 

The Chairman. I would yield to our distinguished ranking mem- 
ber, 

OPENE^G STATEMENT OF SENATOR DANFORTH 

Senator Danforth. That is a very auspicious beginning, Mr, 
Chairman, I have no opening statement either other than to say 
that I think this is really a momentous day. We have a lot of for- 
ward motion going in connection with telecommunications legisla- 
tion, and we welcome the administration's presence today. 

The Chairman, Does anyone else wish to make a statement? 
Senator Exon? 

OPEND^G STATEMENT OF SENATOR EXON 

Senator ExoN. Mr. Chairman, I do have a short opening state- 
ment that I would like to make. And I thank you and Senator Dan- 
forth and Senator Inouye and others who have done a gpreat job in 
trying to put together a package that I think can get universal sup- 
port. 

I am certainly proud to join with you in introducing S. 1822, the 
Telecommunications Act of 1994, This legislation will open a new 
era in my view for telecommunications policy, putting preservation 
and advancement of universal service at the center of the U,S. tele- 
communications policy. 

As important as this legislation is, the massive part of the Amer- 
ican economy will benefit by taking it out of the hands of judges 
and putting it back in the hands of the American people and their 
elected and appointed representatives. 

I am especially pleased that S. 1822 includes substantial portions 
of the Grassley-Exon infrastructure sharing bill, which will help 
advance telecommunications infrastructure in rural America, 

Mr. Chairman, this legislation is as much of an education bill as 
it is a telecommunications bill. No one will be more profoundly af- 
fected by the enactment of the Communications Act than the Na- 
tion's children. They will again access new worlds of knowledge, 
learning, and adventure at home and in school. 

On February 3 I indicated that the Telecommunications Act of 
1994 was a work in progress theory. Today we begin the challeng- 
ing process of fine-tuning the major effort to reform America's tele- 
communications laws, I believe tnat the basic elements of a grand 
compromise are present and obvious in this legislation. Sure, some 
provisions need to be reworked and clarified, but we are off to a 
good start. 



It is my conclusion we should move as quickly as possible and 
practical, and let the marketplace and fair competition prevail. It 
seems to me we cannot assure or dictate in law all of the 
eventualities smd must give authority to the Federal Communica- 
tions Commission to resolve many details. 

In closing I would simply say I will continue to work with all af- 
fected parties to assure that this legislation preserves and ad- 
vances universal service, creates a fair competitive environment, 
spurs investment, and opens new worlds of entertainment, edu- 
cation, and communications for the American people. 

Thank you, Mr. Chairman. Thank you for the leadership of this 
committee, and for your initiative. 

The Chairman. Thank you. Senator Exon. Along those lines of 
moving as expeditiously as possible let me note that Senator 
Inouye is the chairman of our Defense Appropriations Subcommit- 
tee and had already set up a series of hearings, and could not be 
with us here this morning. 

I am including his statement in the record. 

[The prepared statement of Senator Inouye follows:] 

Prepared Statement of Senator Inouye 

Thank you Mr. Chairman. I appreciate your holding this hearing today and I 
want to thank our witnesses for their testimony. I especially want to thank the wit- 
nesses on our third panel, Mr. Miller and Mr. Squadron, for returning to the com- 
mittee to deliver their testimony. They were initially invited to testify before this 
committee in September but were unable to appear because of the length of that 
hearing. 

This is the first in a series of hearings on S. 1822, the Communications Act of 
1994. The issues addressed by the bill are very complex and our ultimate decisions 
will have far-reaching implications into the next century. For this reason it is impor- 
tant that we work cmsely with the executive branch as well as those industry and 
consumer groups impacted by the legislation. 

I want to thank Senator Danforth for his continued efforts in moving this debate 
forward. Last year, he and I introduced legislation that became an important first 
step in the committee's efforts to update the 1934 Communications Act. But today, 
we are here because of the leadersnip of the chairman. Senator Hollings. This bUl 
represents an exemplary bipartisan effort with a majority of the committee mem- 
bers as original cosponsors. 

The Communications Act of 1994 is the most comprehensive and balanced piece 
of legislation under consideration in the Congress. Perhaps the two most significant 
aspects are, first, the transfer of jurisdiction over the modification of final judgment 
to the Congress and the Federal Communications Commission, and, second, the 
preservation of universal service in a competitive marketplace. 

Today we will hear testimony from four Government witnesses. But before we do, 
I want to recognize the role the administration has played in this debate. The ad- 
ministration recognized a long time ago that reform of the communications industry 
will have enormous short-term and long-term benefits for our economy and for our 
quality of life. The Vice President and the Secretary of Commerce have both given 
speeches that have helped to lay the groundwork for the legislation we are consider- 
ing today. Many people believe this is the year that comprehensive conmiunications 
{)olicy will be enacted into law. I share such expectations in large part due to the 
evel of interest exhibited by the administration tnus far. 

Many of the provisions of this legislation are consistent with principles that the 
administration has advocated. For example, our bill encourages private investment, 
establishes mechanisms to promote and protect competition, requires greater access 
for consumers and service providers, preserves and advances universal service, and 
giver the Federal Communications (Jommission the regulatory flexibility to deal 
with new entrants and future changes in the marketplace. 

Finally, I would Uke to draw special attention to the provision in this legislation 
that is perhaps more important to me than any other. I refer to the provision that 
requires all communications carriers to provicie preferential rates to schools, hos- 
pitals, public broadcasters, and other public entities. This provision assures that 



those entities that most need to obtain access to the information superhighway may 
obtain such access at rates they can afford. 

I think we have reached an important threshold in this debate and it is time for 
Congress to move deliberately and expeditiously to enact legislation. I encourage all 
parties to let us know their concerns as soon as possible. I look forward to working 
with the administration, industry, and consumers as the committee moves forward. 

The Chairman. He and I have been looking at these schedules. 
I have got the Subcommittee on Appropriations of State, Justice, 
Commerce, the Supreme Court, again the Secretary of Commerce, 
again the Secretary of State, and we find we are going to have to 
use some Mondays here in March to move this thing along. So, we 
are picking out some dates right now for six or seven hearings at 
least to get all the interested parties in. 

Otherwise, this bill is a combination of the minds and leadership 
of Senator Inouye and Senator Danforth, our colleagues on the 
House side. Chairman Dingell, Congressman Markey, and others. 
We have tried to correlate the movements that have been going on 
for the last, well, you can say a good 10 years. Senator Dole tried 
to get it back in 6 years ago from the judge to the Federal Commu- 
nications Commission. 

We have on this side tried to really in a realistic way to present 
something that could not deter in any way the explosion in tech- 
nology and the wonderful competition ensuing thereof, but other- 
wise nave a policy that would protect the public interest to be ad- 
ministered by the FCC. Are there others? Senator Burns. 

OPENING STATEMENT OF SENATOR BURNS 

Senator Burns. Mr. Chairman, I just want to ask permission to 
enter my formal statement in the record. And I just want to con- 
gratulate you and my ranking member. Senator Danforth, for tak- 
ing this big step. 

As a former farmer and former cowboy and former broadcaster 
and now Senator, I want to see this crop grow because we started 
this when I first came to the Congress back in 1989, and if one 
would have to look to see of all the things that have happened in 
the telecommunications industry in the last 2 years, and we have 
not changed one law — ^things that have happened to diversify and 
to change the landscape of our telecommunications industry, and I 
think most of it for the good. 

So, I look forward to being a part of this debate, and I congratu- 
late you and everybody and the administration for coming forward 
because of the work that Senator Gore then did on this issue both 
in the 101st and 102d Congress. Now, in the 103d, we might find 
that we can pick some fruit of that work. 

So, I appreciate you being here, Mr. Secretary, this morning. 
Thank you very much. 

[The prepared statement of Senator Burns follows:] 

Prepared Statement of Senator Burns 

Witnessing events as they unfold it is obvious, Congress has the communications 
religion and is ready to act. When I first came to this town one of the things I 
learned fast was that if you want to get something done around here let some one 
else take the credit. 

For the last four years I have been busy planting the seed that the time has come 
for Congress to update our nation's conmiunications policy. I have spent the last 
year letting this issue grow on its own. Now it is tune for this farmer, cowboy. 



broadcaster, Senator to tend this crop and to make our nation's information infra- 
structure world class, first cleiss and a gold medal winner for our future generations. 

With the help of this Committee our nation can build a National Information In- 
frastructure which is a broadband interactive communications network available to 
every school, hospital, library, business, government, home and individual in the 
United States. A network on which each American has the choice of sending and 
receiving information at affordable rates. And with the right mix of public policy 
and free market investment, our nation can do all this by the year 2010. 

If our nation can accomplish this goal, the 21st Century will be full of jobs, pros- 
perity and hope for all Americans and our future as the world leaders of the Infor- 
mation Age will be assured. 

When 1 first coined the phrase of building a broadband interactive communica- 
tions network available to every school, hospital, library, business and home in the 
United States, I didn't foresee it being picked up and used by an Aricansas governor 
who was to become President of the United States. But I can say, I did think at 
the time that then Senator Al Gore, an original cosponsor of S. 2800 which I intro- 
duced in the 101st Congress and S. 1200 which I introduced in the 102nd Congress, 
might run for President or Vice President in 1992. I also want to add that the dis- 
tinguished Ranking Member of this Committee, Senator Danforth was a cosponsor 
of my first bill on this issue, S. 2800, and has always been a leader in this area. 

I want to say up front, I thank Chairman HoUings for stepping forward on this 
issue and introducing the Communications Act of 1994. I know he has worked for 
a number of years to remove the modified final judgment line-of-business restric- 
tions on manufacturing telecommunications equipment and his decision to move this 
leCTslation forward is vital to our success. 

The bill before this Committee does not have everything I think it should have, 
but it is an important step forward and contains language on localism I requested. 
For those reasons, I agreed to be an original cosponsor of this bill. 

As many of you know, my history on this issue goes back to my first year in the 
Senate. But the truth is having grown up on a 160-acre farm of two rocks and one 
dirt, I know personally the importance of telephone service and modernizing rural 
America's telecommunications system. 

But using a party line telephone was only the beginning for me. In 1975 when 
I tried to start my Northern Ag Network, I was denied access to the existing micro- 
wave communications system to broadcast my daily agriculture reports. I ap- 
proached my local telephone company about setting up a dedicated telephone line 
and the rest is history. Northern Ag Network was a success. When I sold the net- 
work after I entered politics as a Yellowstone County Commissioner in 1986, it 
served 31 radio stations and six television stations in Montana and Wyoming. Two 
years later, I was elected to the U.S. Senate. 

Now I think it is clear to see the reasons for my interest in this issue. I feel there 
are literally millions of Americans and thousands of Montanans like myself who 
may have an information idea. I don't want any Americans or Montanans short- 
changed because of limited or expensive access to the future National Information 
Infrastructure. 

I don't just want to talk today about the importance of affordable access to the 
National Information Infrastructure or so-called information superhighway for rural 
America but about affordable access for our inner cities as well. One oi the great 
things about being in my positions is I get to learn things about people in all walks 
of Ufe. By visiting and talking with people in the troubled parts of our cities, it is 
apparent that these areas need a direct link to the robust parts of our nation. A 
broadband interactive communications network can provide that vital pipeline to 
pump education and hope into disadvantaged neighborhoods of our cities. 

We never know what might flip a child's Bic, but if we can use the marvels of 
digital, video and computer technology to light the fire in inner city kids minds, they 
can become our nation's future programmers and telecommunications leaders. For 
this reason and this reason alone, our nation can not allow inner cities and rural 
areas to be the last one plugged into the National Information Infrastructure. 

My vision for the National Information Infrastructure is an information super- 
highway with unlimited on and off ramps for every American who wants access at 
an affordable price. 

This bill is pointed in the right direction but in my view does not get us to this 

goal. While this bill will clearly be the vehicle that moves through the Senate, I 
ave began drafting amendments to strengthen the universal service, infrastructure 
sharing and other sections of the bill to provide the incentives for upgrading our 
telecommunications infrastructure. I plan to work with Senators Hollings, Danforth 
and Inouye to improve sections of the bill which are pro-competitive and de-regu- 



latory in nature. And I plan to work with Vice President Gore to develop a new sec- 
tion or Title 7 of the Communications Act to serve our nation in the 21st Century. 

It is my fundamental belief and one that my political party shares that competi- 
tion in the communications industiy is the best incentive to build an affordable Na- 
tional Information Infrastructure. It is a proven fact that competition will improve 
services and lower costs for consumers in this area. But in our nation's inner cities 
and rural areas there is currently little or no competition in the telephone industry 
and there is a lack of competition on the horizon. The fact is it is telephone compa- 
nies or cooperatives that are currently providing telephone service in inner cities 
and rural America. 

While newspapers and broadcasters are leading information providers, telephone 
companies and cooj)eratives quite frankly are the only ones likely to provide ad- 
vanced telecommunications services for inner cities and rural ares in the future. I 
hope I am wrong, but history and economics say I am right. 

Competition in the communications industry which will upgrade telecommuni- 
cations services will take place first in high income and high population density 
cities and suburbs in the United States and in cities like Billings, Missoula, Great 
Falls, Bozeman, Butte and Kalispell in Montana. 

The Bell Alantic/TCI and U.S. West/Time Warner deals clearly point in this direc- 
tion. The majority of U.S. West's local telephone service area also receives cable 
service from TCI in Montana. While most of America views Montana as sparsely 
poDulated and vast, it is approximately 80 percent urban. Most of the urban areas 
of Montana are served by U.S. West and TCI. 

On the other hand rural areeis in Montana are provided telephone services from 
telephone companies and cooperatives. Inner cities are served in most cases by Re- 
gional Bell Operating Companies. 

Southeast Washington, U.C. and rural sections of Montana were the last to re- 
ceive POTS — plain old telephone service — and are currently the last to receive cable 
television service. Unless this legislation is amended inner cities and rural areas, 
I fear, will be the last to have access at affordable rated to the National Information 
Infrastructure. 

I look forward to hearing Commerce Secretary Brown's, FCC Chairman Hundt's, 
and representatives of state and city regulating authorities' opening statements. Be- 
cause I have a meeting with a group of Montana farmers and Agriculture Secretary 
Espy later this morning, I would like to submit questions for today's witnesses for 
written responses. 

Senator HoUings, I am excited about working with you and the rest of the mem- 
bers of this Committee on this legislation and look forward to next few months de- 
bate on this issue. 

The Chairman. Senator Breaux. 

OPENING STATEMENT OF SENATOR BREAUX 

Senator Breaux. Thank you, Mr. Chairman. I too want to say to 
you that we appreciate very much you bringing us to this point. I 
think had it not been for the chairman's leadership that we would 
not be having these hearings today, and I am delighted that we are 
doing it. 

I am very pleased to see our distinguished Secretary of Com- 
merce as our leadoff witness, as well as the Chairman of the FCC 
who we look forward to visiting with. 

To follow up on what Senator Bums said I think we have to face 
reality. We are still running communications policy on an act that 
written in 1934, and the technology that is available today has 
nothing to do with the technology available when Congress last 
wrote a major communications act back in 1934, 60 years ago. You 
know, it is obvious that we should update and upgrade that act to 
deal with the realities of the 20th and soon to be 21st centuries. 
That is why legislation, I think, is absolutely essential. 

The industries have not been sitting back idly while Congress 
has been sitting back letting the courts make these decisions. They 
have been going forward and through the free enterprise system 



they have been struggling through the courts to make sure that 
they can provide the technology that the world demands. 

Unfortunately most of them, operating under the free enterprise 
system, have taken the position as I have said before: I want in 
yours but stay out of mine. And I understand that, but they all 
want to do something that they are not doing now, but they do not 
want others to come into their business and try and compete with 
them. 

So, our job is very difficult. It is to try and be the referee and 
the regulator in legislation which somehow makes sure that every- 
body is being dealt with fairly. And that is the goal, I think, of this 
le^slation and one that I certainly share. 

Thank you. The Chairman. Very good. Senator Stevens. 

OPENING STATEMENT OF SENATOR STEVENS 

Senator Stevens. Mr. Chairman, I was not going to say any- 
thing, but since our good friend, the Secretary, is here I would like 
to make this comment. We are all taking about universal service. 
I am very worried about the investments that are necessary for 
modernization in rural areas. 

In my judgment, if we are really going to take these issues out 
of the courts. Congress and the administration have to realize that 
we must make some basic decisions now. We must be very precise 
in our definitions, otherwise those of us who come from small popu- 
lation States are going to find our providers before the courts and 
before the FCC, spending a lot of money fighting those people who 
are providers in the very populous areas of our country over what 
should be the proper interpretation of the loose framework that 
some of these bills have today. 

I do think that if we are going to really go into to the next cen- 
tury with this bill it has to be very precise. Otherwise, we will be 
right back in court, with the courts taking over the management 
of the telecommunications system if we are not very careful. 

Thank you. 

The Chairman. Very good. Senator Packwood. 

OPENING STATEMENT OF SENATOR PACKWOOD 

Senator Packwood. Mr. Chairman, thank you. I listened to Sen- 
ator Stevens. I agree with him about precise, but I hope that does 
not mean rigid as we start going into the next century. 

I am not going to do it, but I would like to ask everybody here 
to say how many people here favor a level playing field? And my 
hunch is everybody would raise their hand until you ask them to 
define it. And then Senator Breaux is absolutely right. It is defined 
by many people as in a way that gives them a legislated advantage. 

There are only two things that I am concerned with here. One 
is monopolies and an inability for anybody to break in, and the 
other is a guarantee of universal service. If I can be assured of 
those two, universal service and no monopolies, then I am willing 
to let the cable companies have at television and television have at 
broadcasting and broadcasting have at the newspapers, and let ev- 
erybody have a go at it themselves. 

But it is funny in health. In health reform we are moving away 
from skimming and toward community rating, and there are some 



8 

areas of communication where we are moving toward skimming, 
and we are allowing companies to be created that can really take 
some very good business that is very profitable and not share in 
the universal cost. 

And I do not want to do anything that is going to move us away 
from the guarantee to the average person who is not interested in 
the panoply of services that you can get; they want some basic min- 
imum service guarantee. But if we can guarantee that and we can 
guarantee competition, as far as I am concerned, Mr. Chairman, 
this bill could be written in two pages. 

Thank you. 

The Chairman. Very good. Senator Pressler. 

OPENING STATEMENT OF SENATOR PRESSLER 

Senator Pressler. Thank you, Mr. Chairman. I wish to submit 
my prepared statement for the record. 

I think Senator Packwood defined it well by saying no monopo- 
lies, competition, and a chance to participate in competitive mar- 
kets. 

I think that this piece of legislation, S. 1822, is very historic. 
This framework would be much better than having a judge decid- 
ing communications policy. Recently some students asked me who 
really makes decisions in Washington. I said, it depends on the 
issue. Sometimes Federal judges make more decisions that the 
President or Congress. That is because we in Congress have not 
acted. 

But if we can guarantee universal service and competition, if I 
was assured of that and there were no monopolies, I would be able 
to go along with letting a lot of other players compete. 

I, too, am for a level playing field as long as it is tilted slightly 
toward me. [Laughter.] 

S. 1822 is a balanced starting point for addressing much needed 
regulatoiy reform for our telecommunications industry. Since the 
consent decree breaking up AT&T in 1982 many critical decisions 
about competition in the telecommunications industry have been 
made by the Justice Department and the U.S. courts. 

I, too, am very interested in universal service. I think our coun- 
try's economic strength is based upon universal access to our tele- 
communications network. Basic telephone and telecommunications 
connections are available throughout our Nation. All citizens have 
access. Everyone, regardless of location can communicate and con- 
duct business nationally. 

If we could assure universal service I would say let all the play- 
ers in. 

I am very interested in the smaller telephone and cable oper- 
ations in my State of South Dakota. There are several improve- 
ments or clarifications to S. 1822 which I believe will improve the 
bill, and I shall be offering those as amendments or working with 
the committee to improve the language. 

Geographic rate averaging should not be abandoned. Service to 
high-cost areas must not be priced beyond the reach of rural cus- 
tomers or their small telephone company providers. Certain policies 
that would support universal service in large cities may not apply 
in small cities, towns, and rural areas. 



The same is true with regard to the cable telco buy-out provi- 
sions. In some areas of the country there may not be enough eco- 
nomic base to support two wires to the home. Small cable compa- 
nies should have more flexibility to enter joint ventures with tele- 
phone companies in small towns and rural areas. 

S. 1822 uses the FCC's definition of "rural" — areas with a popu- 
lation of 2,500. Raising this figure to 10,000 or 20,000 may help. 
Raising this figure would also relieve regulatory burdens on small 
companies. 

Mr. Chairman, I ask unanimous consent to place the rest of my 
statement in the record. 

[The prepared statements of Senator Pressler and Senator 
McCain follow:] 

Prepared Statement of Senator Pressler 

Mr. Chairman, thank you for holding today's hearing on S. 1822, the Communica- 
tions Act of 1994. I was pleased to join you, the distinguished Ranking Member, 
Senator Danforth, and a majority of our colleagues on the Commerce Committee as 
an original cosponsor of S. 1822. This legislation represents the most comprehensive 
revision of the Communications Act of 1934, since it was passed sixty years ago. 

Technological change has outpaced our existing regulatory framework. We need 
new rules to reflect changing technologies and evolving markets. At the same time, 
we need to protect and enhance the strengths of the current system. That is what 
S. 1822 tries to do. I commend you and Senator Danforth for your leadership. 

S. 1822 is a balanced starting point for addressing much-needed regulatory reform 
for our telecommunications industry. Since the consent decree breaking up AT&T 
in 1982, many critical decisions about competition in the telecommunications indus- 
try have been made by the Justice Department and the U.S. courts. 

At the same time, revolutionary changes have occurred in the telecommunications 
industry. And the revolution is far from complete. The convergence of various com- 
munication media — telephone, cable, information services, file transfer protocols via 
computers, compact disc and high definition television systems — requires us to get 
the judicial system out of the minutiae of the decisionmaking process. The tele- 
communications, computer and systems development industries are among the most 
competitive in the world. We have an edge in these industries worldwide. Any action 
Congress take& on communications policy must foster these industries' comjxjtitive- 
ness domestically and internationally. 

S. 1822 addresses ways these services can be delivered domestically. Universal 
service has always been one of my primary concerns. This is not surprising. My 
home state. South Dakota, is rural. Competition is as unlikely in most areas of my 
state as it is cutthroat in urban areas of the nation. 

Consistent with my concern that we provide competition among these services, I 
will work with the Committee to retain a level playing field for smaller telephone 
and cable operations. There are several improvements or clarifications to S. 1822 
which I believe will improve the bill. 

It is important to clarify the fundamentally sound universal service provisions of 
the bill. Existing universal service mechanisms are not affected by the legislation. 
There should be no doubt that the states will not be required to absorb costs for 
universal service within their borders, as some have contended. Geographic rate 
averaging should not be abandoned. Service to high cost areas must not be priced 
beyond the reach of rural customers — or their small telephone company providers. 
We must recognize that certain economic models which can support universal serv- 
ice in population centers may not apply to sparsely-populated states. 

The same is true with regard to the cable/telco buyout provisions. In some areas 
of the country, there may never be the economic base to support two wires to the 
home. Small cable companies should have more flexibility to enter joint ventures 
with telephone companies in small towns and rural areas. S. 1822 uses the FCC's 
definition of rural — areas with a population of 2500. Raising this figure to 10,000 
or 20,000 may help. Raising this figure would also relieve regulatory burdens on 
small companies. 

I look forward to hearing from today's witnesses. 



10 

Prepared Statement of Senator McCain 

Mr. Chairman, I am pleased that the Commerce Committee is today beginning 
hearings on the Communications Act of 1994. Reality tells us that the communica- 
tions revolution has outpaced the Congress and the federal government. For too long 
the Congress has passively watched the courts shape our Nation's communications 
policy. Now, the Congress is taking the correct action by asserting its duty to set 
a responsible national telecommunication's policy. 

I applaud the Commerce Committee for addressing this issue. The Committee has 
a formidable task ahead and I am confident it is up to the job. 

I look forward to a lively and thorough debate on this issue. The outcome of that 
debate will effect virtually every American. I intend to play an active role in that 
debate and do all I can to remedy any flaws I believe exist in the bill and to defend 
this measure's many outstanding provisions. 

The complexity of this issue is staggering and its eventual impact on the public 
is enormous. We must listen closely to all affected parties and weigh all concerns 
on every side of this issue. Most importantly, we must contemplate how this legisla- 
tion will effect the American consumer. 

Mr. Chairman, I am sure we will hear much about how people will benefit with 
competition. I agree that competition is good. But 1 am exceedingly concerned that, 
we ensure that competition achieve its ultimate goal — better and more cost-bene- 
ficial service to the consumer. I look forward to working with the Committee on lan- 
guage to the bill that will protect consumers from unreasonable rate increases for 
services they do not desire. 

As I stated, virtually every American is a communications consumer. I believe we 
must put the needs of the public first as we debate how their communications needs 
can best be served. Further, I believe we must do all we can to ensure that small 
businesses are not hurt or damaged by our actions and remain a competitive player 
in the communications industry. 

Lastly, we must work to be sure that our actions do not unfairly give one company 
or industry an advantage over any other — being especially cognizant of the smaller 
communications, cable, and publishing companies. 

I am also very concerned that the bill as currently drafted may place an almost 
insurmountable burden on some companies, especially certain Bell operating compa- 
nies. I trust this is not the goal of the bill. 

Fair and equitable competition in ALL areas of communication and information 
transfer services must be our goal. We should not establish policy that slows that 
down or which discourages investment in rural or pworer areas. 

Additionally, I hope that we will focus our attention on market forces, and not 
government intervention in every way possible. I have sincere doubts that the gov- 
ernment and the FCC will be able to administer a national universal service fund 
in a manner that will most benefit the consumer. 

All of th-se issues I hope, either by amendment or through debate, will be ad- 
dressed during the legislative process. 

Mr. Chairman, I look forward to learning the views of the Administration, my col- 
leagues, industry, and consumers regarding this bill. 

The Chairman. Very good. We will now recognize Secretary 
Brown. We welcome you to the committee, Mr. Secretary, and we 
would be delighted to hear from you. 

STATEMENT OF HON. RONALD H. BROWN, SECRETARY, 
DEPARTMENT OF COMMERCE 

Secretary Brown. Thank you, Mr. Chairman, Senator Danforth, 
members of the committee. 

Sixty years ago the Secretary of Commerce of the United States 
sent a study to President Franklin Roosevelt addressing the new 
challenges of telecommunications. That study was transmitted by 
the President on the same day to the then chairman of the Inter- 
state Commerce Committee of the U.S. Senate. The last 60 years 
have been shaped by the events of 1934. History reminds us that 
the questions we face are not new. What is new is the world in 
which these questions must be asked and answered. 



11 

Since the founding of our Nation, successive communications 
technolo^es have overtaken their predecessors, from pony express 
to electric telegraph to telephone to radio to television to micro- 
wave to computers and to other digital technology, a world in 
which all information can now be coded as a series of zeros and 
ones. Mr. Chairman, this is the year, we believe, to enunciate and 
enact the right answers for this new era in telecommunications. 

The administration has articulated five basic principles that we 
believe should govern the content of such legislation. We must have 
an assurance of universal service; we must promote investment; we 
must promote competition; we must secure open access and inter- 
operability; and we must formulate governmental action that itself 
flexibly adapts to new market conditions. 

Mr. Chairman, your legislation and the legislation of your co- 
sponsors, S. 1822, the Communications Act of 1994, captures the 
spirit of 1934 when the administration and Congress worked to- 
gether to usher in the last great information revolution. It also cap- 
tures the very essence of the principles which the administration 
has set forth. Indeed, the first three titles of your bill expressly re- 
flect those principles: the protection and advancement of universal 
service, telecommunications investment, and regulatory reform. 
Other portions of the bill address methods by which you believe it 
is possible to strike an appropriate balance between the provision 
of more competition and the protection of fair competition and the 
means by which nondiscriminatory access can be secured to various 
parts of the network. 

I would like to take just a few moments, Mr. Chairman, to briefly 
review the administration's five principles and how they relate di- 
rectly to S. 1822. Additional detail is provided, of course, in my 
written testimony and the accompanying appendix. 

Let me begin with universal service. No goal, we believe, is more 
important. The President in his State of the Union Address and the 
Vice President in a series of speeches identified universal service 
as a simple, compelling national goal. We believe we must assure 
that the extraordinary opportunity which our national information 
infrastructure can provide does not produce a Nation of information 
haves and information have nots. 

We believe that it is crucial that we make an absolute commit- 
ment to connect all of your classrooms, all of our libraries, and all 
of our hospitals and clinics to the information superhighway by the 
year 2000. Your bill, Mr. Chairman, would add a new section to the 
Communications Act that instructs the Federal Communications 
Commission to enhance the availability of advanced telecommuni- 
cations services to all public, elementary, and secondary school 
classrooms; health-care institutions, and libraries. Those are pre- 
cisely the institutions identified in the administration's challenge, 
and we wholeheartedly endorse vour approach. 

Meeting this challenge is only part of our work toward a new 
model of universal service. Like the administration's proposals, S. 
1822 makes explicit in the Communications Act, for the very first 
time, the existence of universal service as a specific national goal. 
It instructs the Federal Communications Commission and the 
States to work together to craft an evolving definition of "universal 
service," and it requires all providers of telecommunications serv- 



12 

ices to contribute to the provision of universal service. This struc- 
ture will suit the new age of information. It will ensure that the 
information highways act as a pathway, not a barrier between 
Americans. 

We must also encourage private investment. That is the second 
of our key principles. Because it is the private sector that will build 
and operate the information superhighways. Mr. Chairman, your 
bill takes bold and important steps in that direction. 

It used to be thought that telephone service, local and long dis- 
tance, was a natural monopoly. That was until the activities of 
American entrepreneurs and the modified final judgment proved 
that it was not. Even then it was assumed that local telephone 
service was best provided without competition. We strongly believe 
that the right policy now is to open local telephone markets to in- 
vestment and competition through unbundling, interconnection, 
and interoperability. Mr. Chairman, your bill would take giant 
steps to accomplish that goal. 

One aspect of interconnection deserves, we feel, additional dis- 
cussion. S. 1822 would leave in place current State prohibitions to 
entry into telecommunications markets for 2 years or until the 
bill's universal service obligations are implemented. While we agree 
entirely with the purpose of this provision, we believe that this se- 
quencing of universal service followed by unbundling is not, in fact, 
necessary. Rather, we believe that the two can and should proceed 
simultaneously. 

Mr. Chairman, I know that this is an important and, to some, 
a sensitive issue. The administration understands the legitimate 
concern that current monopoly service might dissolve before the 
foundations for a universal service regime are in place. We under- 
stand the concern that competition may be very slow in coming to 
some parts of the United States, particularly rural areas. But we 
believe that there is no danger by proceeding in parallel on univer- 
sal service and unbundling. That belief rests not just on the good 
offices of Grovernment, but also on our belief that competition will 
bring its own advantages, even to rural and isolated parts of Amer- 
ica. 

For example, it may be true that there are some parts of the 
country that will not in the near future enjoy competition from 
more than one provider of land-line telephone service. But particu- 
larly as technology advances, those communities may well find that 
the costs of cellular or PCS or satellite communications create real 
competition with the local exchange carrier. We want to make sure 
that the advantages of competition reach every American 
consumer, even as we ensure that universal service obligations 
safeguard and extend the reach of the telephone networks that we 
have built. And this administration believes, quite simply, that we 
can do both and do them together. 

Our next principle, to provide and protect competition, is closely 
linked to our emphasis on private investment. Mr. Chairman, your 
legislation notably addresses the question of competition in its title 
Iv, which would replace the modified final judgment that currently 
governs the activities of regional Bell operating companies, and we 
applaud those provisions. The single most important prerequisite 
for fair competition is the unbundling and interconnection of the 



13 

local telephone exchanges. Title IV of your legislation applies spe- 
cific tests and processes in place of the current text of the modified 
final judgment. 

S. 1822 provides that before the RBOC's can provide long-dis- 
tance service, several preconditions must be met. One is a showing 
of actual and demonstrable competition. We would suggest, Mr. 
Chairman, that reliance on the current test of section VIII(c) of the 
modified final judgment is sufficient. That standard requires an 
RBOC to establish that is no substantial possibility of harm before 
it can enter a new market. In our view, the application of that 
standard would subsume the need for a separate actual competition 
standard by permitting a thoroughgoing analysis of competitive fac- 
tors by an agency, the Federal Communications Commission, that 
is well schooled in these issues. 

Our third principle is open access. We applaud the steps that S. 
1822 takes in this regard. Under your legislation, Mr. Chairman, 
the telephonic proportions of the network would be governed by 
open-access principles, but the video programming portions would 
not. 

We understand that at the present that division might seem to 
best reflect past regulatory decisions, but the future may in fact 
blur to the point of extinction current regulatory boundaries be- 
tween telephony and cable. That is why in two specific respects 
that are explained more thoroughly in my written testimony, we 
would urge that S. 1822 provide that regulatory distinction turns 
on the nature of services offered and the position of a business in 
the marketplace, rather than on the regulatory history of the firm 
providing those services. 

This same thought informs our final principle, that Government 
action must flexibly and responsively adapt to changing market 
conditions. Telephony is generally thought of as a switched net- 
work of narrowband voice communication. Its great value lies in its 
flexibility; anyone on the network can connect to anyone else. In 
fact, we are close to fulfilling our vision of a universal network. Al- 
though more must be done before we can declare victory, still it is 
notable that over 94 percent of American homes have telephones. 

Video services, captured most notably in the regulation of cable, 
is thought to be different. Flexibility is quite limited and commu- 
nication one way. But wider bandwidth permits more information 
to flow across the networks, bringing broadcast programming and 
cable networks to about two-thirds of American homes. Traditional 
regulation has not only treated these two industries differently; it 
prohibited them from competing with one another. 

There is, however, no current regulatory model designed to over- 
see a company that combines cable and telephone and possibly 
other data, voice, and video transmission services into an inte- 
grated package of services delivered over the same facilities. It is 
to fill this gap that we propose the enactment of a new Title VII 
of the Communications Act whose purpose is to ensure that regula- 
tion matches the marketplace, and that as the marketplace 
changes outmoded and unnecessary forms of regulation do not limit 
its growth and expansion. 

A new title VII would provide unified, symmetrical treatment of 
providers of two-way broadband services. It would provide impor- 



14 

tant incentives to investment, to competition, to open access and to 
universal service, while constructing a regulatory structure that we 
believe can stand the test of time. For these reasons, I urge the 
committee to include title VII in its legislation. 

Mr. Chairman, I would like to conclude by considering the nature 
and size of the information marketplace, and by praising you and 
the cosponsors of 1822 for your vision and your leadership. The in- 
formation marketplace by one definition now constitutes about 10 
percent of our domestic economy. But even this understates the 
real impact of the information revolution. By one estimate, two- 
thirds of American workers are in information-related jobs. That 
means that the ripple effects on American industry will be impor- 
tant, that America's companies and our workers will have a new 
tool to use in their continuing struggle to compete and win in this 
tough global marketplace. 

Opportunities are growing around the world. The development of 
the national information infrastructure through legislation like S. 
1822 will help to ensure that we maintain and gain world leader- 
ship in the global information marketplace. S. 1822 will help us to 
reach that goal, and that is why I welcome this opportunity to ap- 
pear before you on behalf of the administration and why I look for- 
ward, as do all of us in the administration, to working with you to- 
ward the enactment of the Communications Act of 1994. 

Thank you, Mr. Chairman. 

[The prepared statement of Secretary Brown follows:] 

Prepared Statement of Secretary Ronald H. Brown 

Mr. Chairman, sixty years and one month ago, on January 23, 1934, the Secretary 
of Commerce sent a study to President Franklin Roosevelt addressing the new chal- 
lenges of telecommunications. That study was transmitted by the President on the 
same day to vour predecessor, the Chairman of the Interstate Commerce Committee 
of the Unitea States Senate, who had, in fact participated in the inter-governmental 
review along with a congressman from Texas, Sam Rayburn. 

That report, in 1934, decried the lack of coordination within the Executive Branch 
(anticipating by some years the concept of re-inventing government), called for effec- 
tive regulation through the creation of the new body, which became the Federal 
Communications Commission, and considered how government could best promote 
the construction of the basic systems of two-way electronic communications. 

Even at the time, these were not new issues. One hundred and fifty years ago, 
in 1844, Samuel Morse, with governmental assistance, demonstrated in tne United 
States Capitol that the electric telegraph would work. But, although Congress wise- 
ly recognized the importance of investment in technology research and development, 
it also wisely resisted the request that the government own and operate the com- 
mercial telegraph system. To the continuing benefit of American consumers, private 
competition built the first national system of electronic transmission. 

In 1934, my predecessor revisited the issue, evaluated the pros and the cons, and 
recommended that the communications system "at least for the present," be pri- 
vately owned and publicly regulated. 

The present has lasted a long time — just over sixty years. That era has been 
shaped by the decisions that Congress made in response to the 1934 study. Passage 
of tne Communications Act of 1934 established the Federal Communications Com- 
mission. The Communications Act, as it has evolved over the past six decades, has 
overseen the development of the broadcast, cable and telephone industries. 

That is why 1 begin by recalling the discussion as it occurred sixty vears ago. His- 
tory reminds us that the questions we face are not new. What is the appropriate 
role of government in promoting conmiunications markets? How can we encourage 
private investment and competition? How can we encourage and when must we en- 
sure that all Americans are advantaged by communications technology? 

What is new is not the questions — what is new is the world in which these ques- 
tions must be asked, and answered. Since the founding of this country, successive 
communications technologies have overtaken their predecessors: from pony express 



15 

to electric telegraph to telephone to radio and television, to microwave to computers 
and other digital technology — a world in which all information can be codea as a 
series of zeros or ones. 

The challenge is great. If we succeed, we will unleash a torrent of investment, 
competition and achievement. Businesses will become more competitive and new 
markets for new goods and services will be created. But that achievement will not 
be merely technological or even just economic. It will include schoolchildren who will 
learn better, patients who will receive better medical treatment and workers who 
will better themselves. 

Mr. Chairman, this is the year for us to enunciate — and enact — the right answers. 
That is why, in his State of the Union Address, President Clinton called upon Con- 
gress to enact in 1994 legislation that will help ensure the creation of the National 
Information Infrastructure. That is why we nave formed an inter-agency effort, 
which 1 chair, to focus on telecommunications policy, on the applications of informa- 
tion technologies, and on the way that government itself can join the work of the 
National Information Infrastructure. 

That is also why we have articulated the five basic principles that should govern 
the content of legislation. We must (i) ensure universal service, (ii) promote invest- 
ment, (iii) provide and protect competition, (iv) secure open access, and (v) formulate 
governmental action that itself flexibly adapts to new market conditions. 

It is also why we were pleased by the introduction, Mr. Chairman, of your legisla- 
tion, S. 1822, the Conrununications Act of 1994. Its title aptly captures the spirit of 
1934 — when the Administration and Congress worked together to usher in tne last 
great information revolution. Thai is what we will do again this year. We will do 
so by working with you, Mr. Chairman, and by working with other members of your 
committee, including, of course, Senators Inouye and Danforth, whose sponsorship 
of S. 1086 in the last session helped to build the consensus that we seek. 

The broad framework of your legislation is consistent with our goals. The details 
can be discussed as the legislative process moves forward. But the most important 
point — which I want to emphasize in my testimony today — is the broad level of con- 
sensus between the Administration's five principles and the direction and goals of 
your legislation. The first three titles of your bill expressly refiect the Administra- 
tion's principles: the protection and advancement of universal service, telecommuni- 
cations investment, and regulatory reform. Other portions of your bill address meth- 
ods by which you believe it is possible to strike an appropriate balance between the 
provision of more competition and the protection of fair competition and the means 
oy which nondiscriminatory access can be secured to various parts of the networic. 

TO PRESERVE AND ENHANCE UNIVERSAL SERVICE 

Let me begin my review of our five principles by addressing universal service. The 
importance of protecting the public interest is understood both by the Administra- 
tion and by you, Mr. Chairman, and the members who are co-sponsoring the legisla- 
tion. 

Why is that important? Because in a competitive world, we must empower our 
young f>eople, our workers and our businesses through the use of word processors 
and computers and modems and the like. Empowered by information technology, 
American workers will continue to be the most productive in the world. 

But competitive success cannot be confined to iust part of America. 

When John Kennedy was running for Presiaent, he made a very simple state- 
ment: "I don't want," he said, "the talents of any American to go to waste." 

Neither do I. Neither does this Administration want the talents of any American 
to go to waste. 

That is why the President in his State of the Union Address and the Vice Presi- 
dent in his earlier address stated a simple — but compelling — national goal. 

We must connect all of our classrooms, all of our libraries, and all of our hospitals 
and clinics to the information superhighway by the year 2000. We can achieve this 
goal through a new definition of public-private partnerships, one that replaces the 
traditional adversarial relationship with a more productive dialogue based on con- 
sensus and conmion goals. But, one way or another, we will meet this national goal. 

S. 1822 shows us now government can contribute to that public-private partner- 
ship. Your bill would add a new section to the Communications Act that instructs 
the FCC to enhance the availability of advanced teleconununications services to all 
public elementary and secondary school classrooms, health care institutions, and li- 
braries. Those are precisely the institutions identified in the Administration's chal- 
lenge and we wholeheartedly endorse your belief that the FCC must be empowered 
to search for means to reach our national goal, including, as you suggest, the use 
of preferential rates for telecommunications carriers that use public rights of way. 



16 

This challenge is only part of our work towards a new model of universal service. 
Like the Administration's proposal, S. 1822: 

• makes explicit in the Communications Act, for the first time, the existence of 
universal service as a national goal, 

• instructs the FCC and the states to work together to craft an evolving defini- 
tion of universal service, and 

• requires all providers of telecommunications services to contribute to the provi- 
sion of universal service. 

In several respects, we suggest that the approach to fulfilling these universal 
service goals could be made more flexible. The Administration believes that univer- 
sal service provisions in legislation should provide more general guidance to the 
FCC and the states. In particular, we are concerned that the detailed provisions 
now in S. 1822 may unnecessarily limit the mechanisms that the FCC and the 
states can use in promoting universal service goals, such as the current Universal 
Service Fund and "Lifeline and "Link-Up America" programs. For example, all of 
these were developed jointly by the FCC and the states, and involve federal support 
(through charges assessed interstate carriers), but none involve the states "distrib- 
uting" funds as required by S. 1822. We believe that the FCC and the states should 
have sufficient flexibility to design a universal service system that best meets the 
critical goals and policies that the bill establishes. 

This structure will suit the new age of information. It will ensure that the infor- 
mation highways act as a pathway— but not as a barrier — between Americans. That 
is a goal, Mr., Chairman, that is critically important to me. That is why I have in- 
structed Larry Irving, the Assistant Secretary for Telecommunications, to conduct 
a series of universal service hearings around the country. Already, hearings have 
been held in New Mexico and Los Angeles, and more are planned. 

The input we are receiving at these hearings is exemplified in the remarks made 
by New Mexico's Lieutenant Governor, Casey Luna. At the Department's first hear- 
ing in Albuquerque, he urged that access to new telecommunications technologies 
be recognized as social and economic necessities for rural America. He explained 
that finding a doctor in most of rural America is "all but impossible," and noted that 
there are parts of New Mexico where people are one-hundred-and-fifty or more miles 
from a hospital, a situation that could be remedied by modern telecommunications. 

Another witness, Erich Strebe, a coordinator for the New Mexico Small Business 
Development Center, testified that 70 percent of the small businesses with whom 
he comes into contact "have no real understanding of what an information highway 
is." He recommended the creation of strong incentives to get small businesses on 
the network and connected to programs such as NIST's Manufacturing Technology 
Centers and other institutions that work closely with small businesses. 

In addition to these regional hearings, I and other Administration officials have 
met with representatives from a variety of industry sectors, public interest groups, 
labor, state and local governments, and members of the Nil Advisory Council to en- 
sure that we understand their needs and perspectives. The Administration is 
strongly committed to extensive outreach activities and will continue to meet with 
a variety of Nil stakeholders. 

TO PROMOTE PRIVATE INVESTMENT 

We must encourage private investment — the second of our key principles — be- 
cause it is the private sector that will build the information superhighways. That 
is the lesson that we have learned and re-learned throughout our history. The vi- 
brancy and creativity of our telecommunications industry is a tribute to the road 
that was taken — permitting competition to bring lower prices and technological in- 
novation to American customers. 

We do not have to look back sixty or one hundred-and-fifty years to confirm the 
truth of that belief. Nineteen ninety4our also marks the tenth anniversary of the 
break-up of AT&T. Since that time, the price of interstate long distance service for 
the average residential customer has declined by more than 50 oercent. And at the 
same time, the AT&T network, pressed by competition, became fully digital long be- 
fore it had previously been thought possible. 

Mr. Chairman, your bill takes important additional steps in the same direction. 
It used to be thought that telephone service, local and long distance, was a natural 
monopoly — until the activities of American entrepreneurs and the Modified Final 
Judgment proved that it was not. Even then, it was thought that local telephone 
service was a monopoly — although your bill wisely recognizes that it does not have 
to be. 

The rirfit policy is to promote competition in local telephone service by both re- 
moving tne government Darriers to the entry of new competitors, such as state and 



17 

federal exclusive franchises or licenses to ofTer service, and afTirmatively requiring 
the unbundling, interconnection and interoperability of competing systems. In short, 
we will remove anti -competitive government regulation and leave in its place, not 
a vacuum of public policy, but pro-competitive, pro-investment policies. 

Mr. Chairman, your bill would move towards the accomplishment of these goals. 
By adding a new Section 230 to the Communication Act, your bill would ensure the 
ability of a wide variety of companies to enter the local telephone business, would 
require interconnection and nondiscriminatory access, and would help to introduce 
competition into the pricing of local telephone services. It would, in other words, 
help open the local telephone exchanges to the greater private investment that will, 
in turn, provide lower prices and a greater selection of services to our consumers. 

We do suggest, however, that the interconnection and unbundling reouirements 
be more specific, and we have provided you, Mr. Chairman, with legislative lan- 
guage to accomplish that aim. 

One aspect of interconnection deserves, we believe, additional discussion. S. 1822 
would leave in place current state prohibitions on entry into telecommunications 
markets for two years or until the bill's universal service obligations are imple- 
mented. While we agree entirely with the purpose of this provision, we believe that 
this "sequencing" ofuniversal service followed bv unbundling is not, in fact, nec- 
essary. Rather, we believe that the two can, and should, proceed simultaneously. 

There are two reasons for our view. First, we believe that the entry of new firms 
into local telephone markets will not occur immediately, even under the Administra- 
tion's proposals. Some limited time will be necessary to make the appropriate ar- 
rangements. For example, it will take some period of time for the FCC and the 
states to develop regulations that implement the unbundling and interconnection 
policies set out in S. 1822. Moreover, it will take some additional time for firms to 
actually be prepared to take advantage of those new rules to compete fully in the 
local telephone markets. Thus, we believe that the additional delay of the kind con- 
templated by S. 1822 would be unnecessary and perhaps counterproductive. Second, 
and following from the first point, we think the nature of expected change in the 
local markets will accommodate the implementation ofuniversal service obligations 
before there can be any harm to the public interest. 

Mr. Chairman, I know that this is an important issue. We have discussed it before 
and I am sure that we will discuss it again. We understand the legitimate fear that 
current monopwly service might dissolve before the foundations for a universal-serv- 
ice regime are in place. We understand the concern that competition may be very 
slow in coming to some parts of the United States, particularly rural areas. 

But we believe that tnere is no danger by proceeding in parallel. We believe, in 
other words, that we can simultaneously bring the advantages of competition to 
local telephone customers, while ensuring that the public interest is served. And 
that belief rests not just on the good offices of government, but also on our belief 
that competition will bring its own advantages — even to rural and isolated parts of 
the country. For example, it may be true that there are some parts of the country 
that will not, in the near future, enjoy competition from more than one provider of 
land line telephone service. But, particularly as technology advances, those commu- 
nities may well find that the costs of cellular or PCS or satellite communications 
create real competition with the local exchange carrier. We want to make sure that 
the advantages of competition reach American consumers even as we ensure that 
universal service obligations safeguard — and extend — the reach of the telephone net- 
works that we have built. And this Administration believes, quite simply, that we 
can do both. We are all heading — together — in the right direction. 

TO PROVIDE AND PROTECT COMPETITION 

Our next principle — to provide and protect competition — is closely linked to our 
emphasis on private investment. That is because competition is the single most im- 
portant means of encouraging private investment. And because fair competition is 
a prerequisite to the continuation of competitive enterprise. 

One important aspect of competition is, of course, the freedom to compete on 
prices. For good and substantial reasons, regulation of monopolies does not gen- 
erally permit price competition. But, as communications markets become more and 
more competitive, we must be prepared to take advantage of price competition that 
will advantage consumers. 

The regulation of long-distance telephone carriers offers a cogent example. AT&T, 
clearly the largest player in this market, has remained under price regulation while 
its competitors, who lack market power, have been free to set their own prices. 
Moreover, as competition has increased, the regulation that the FCC applied to 
AT&T has been adjusted to better match the conditions in the marketplace. As I 



18 

mentioned before, this regime has brought substantial savings to long-distance cus- 
tomers. 

We suggest, Mr, Chairman, that the same concept be expanded in your legisla- 
tion. S. 1822 currently permits the FCC to forbear from the regulation of interstate 
rates where regulation is not needed to protect the public interest. We would go fur- 
ther by also preempting state regulation of the rates' for intra-state services for any 
firm that the FCC finds to lack market power, although the states should be per- 
mitted to petition the FCC to retain or regain authority to regulate such rates. In 
this manner, we would more quickly bring the advantages of price competition to 
local consumers, while retaining such regulation for those entities that have market 
power and, with it, the ability to distort tne marketplace. 

Competition can also flow, of course, from the entry of local telephone companies 
into otner commercial activities including, for example, the provision of video pro- 
gramming. Here, the Administration agrees with the general princiole that you pro- 
pose: local telephone companies, which now enjoy regulated monopoly status, should 
not be permitted to buy existing cable systems in their service areas. Unlike S. 
1822, however, the Administration would prefer that this principle can be revisited 
by the FCC afler five years. 

We do not mean to suggest, of course, that the prohibition on buyouts should nec- 
essarily expire in five years. The FCC might decide that competitive conditions re- 
quire that it remain in place or that it be modified, perhaps for certain kinds of 
markets but not for others. 

Administrative discretion should exist because, quite frankly, we are acutely 
aware of the rapidly changing and accelerating pace of technology and of the infor- 
mation markets. It is very important that government keep up with changing condi- 
tions. And it is equally important, therefore, that legislation not include statutory 
requirements that could conceivably outlive their usefulness. 

Mr. Chairman, your legislation most notably addresses the question of competi- 
tion in its Title IV, which would replace the Modified Final Judgment (MFJ) that 
currently governs the activities of the Regional Bell Operating Companies (RBOCs). 
Your title establishes standards that would govern the entry of the RBOCs into 
manufacturing, information services and electronic publishing, alarm services and 
long distance telephony. 

Let me begin by noting the Administration's gratitude for and appreciation of the 
excellent job done by the federal judiciary in its oversight of the Modified Final 
Judgment during the past decade. The time has come to move beyond a decree gov- 
erning a specific piece of litigation to a broader policy that can only be createof by 
the Congress and the Executive Branch. But this conclusion does not detract — in 
any way — from the brave and important contributions that have been made by the 
judiciary during the past decade. During times when the future was uncertain and 
the best methods hard to discern, the federal courts pushed steadfastly for action 
in the public interest. 

Let me also note, in this connection, the critical role played by the Department 
of Justice in that process. For over two decades, the Department of Justice — through 
Republican and Democratic Administrations alike — assembled the evidence, pros- 
ecuted the AT&T case, and assisted the courts in administering the decree in that 
case. 

The result has been a flowering of innovation and consumer benefits that dem- 
onstrates uneauivocally the importance of competition. That is why we believe that 
reform of the MFJ must be inextricably linked to creating competition in the local 
telephone exchanges to competition. Permitting the RBOCs to expand the services 
they offer can provide additional competitive momentum. But, at tne same time, we 
must ensure that the RBOCs are not able to use their present monofxjly positions 
to provide an unfair advantage in the provision of other services. 

The single most important prerequisite for fair competition is the unbundling and 
interconnection of the local telephone exchanges. Wny? Because a monopoly that 
does not exist cannot, of course, be used as unfair leverage. Thus, the reforms that 
your legislation would bring to the local telephone exchanges would, at the same 
time, satisfy an important condition for moving forward on tne MFJ issues. 

Title rV of your legislation, of course, goes beyond the initial condition of 
unbundling and interconnection in order to apply specific tests and processes in 
place of the current text of the MFJ. As your Committee may be aware, legislation 
is currently pending in the House of Representatives that would apply somewhat 
difTerent standards and processes to the resolution of the same MFJ issues. 

S. 1822 provides that, before the RBOCs can provide long-distance service, several 
pre-conditions must be met. One is a showing of actual and demonstrable comp)eti- 
tion. We would prefer a difTerent approach through which the Department of Justice 
would administer the current test of Section VIIUc) of the Modified Final Judgment. 



19 

That standard requires an RBOC to establish that there "is no substantial possibil- 
ity of harm" before it can enter a new maritet. In our view, the application of that 
standard by the Department of Justice would subsume the need for a separate "ac- 
tual competition" standard by permitting a thorough-going analysis of competitive 
factors by an agency well-schooled in these issues. 

Our view of ooth S. 1822 and the House legislation is similar. We support the 
broad principles of both. We understand that both attempt to reach the dual goals 
of more competition and fair competition. We look forward to the swifl movement 
of both bills in their resp)ective houses. As the legislative process goes forward, the 
Administration intends to consult with members of both houses, as well as the pri- 
vate and public interest sectors, to formulate its own, detailed, view of the proper 
resolution of these issues. 

TO SECURE OPEN ACCESS 

Private investment and fair competition are not sufficient, by themselves, to en- 
sure that the public will benefit from infrastructure development and the free flow 
of market forces. That is because, as we have long recognized in this country, some 
players have the capability to block the ability of information providers, such as 
software producers or film studios, to reach information customers. 

Bottlenecks can arise as a result of governmental action or as a result of natural 
monopoly. One of the goals of this Administration is to reach the day when govern- 
mental action does not, itself, create access problems; when everyone can compete 
against everyone else to provide any information product or service. 

But, until that day arrives, government must take action to ensure that artificial 
constraints do not limit the potential of the National Information Infrastructure. 

Under your legislation, Mr. Chairman, the teleohonic portions of the network 
would be governed by open access principles but tne video programming portions 
would not. We understand that, at tne present, that division might seem to oest re- 
flect past regulatory decisions. 

But the future may blur — to the point of extinction — current regulatory bound- 
aries between telephony and cable. Consider, for example, a switched broad band 
network operated by a telephone company. That network, because it is governed by 
"telephone principles would have to permit a video programmer the ability to offer 
its programs to customers linked to the network. Why should the result be different 
if the same network is owned by a cable company? Or, and this is an important 
point, why should the result be different if the network is considered a "cable" net- 
work owned by a telephone company rather than a telephone network owned by a 
telephone company? 

In our view it should not. That is why, in two specific respects, we believe that 
S. 1822 should be modified so that regulatory distinction turns on the nature of 
services ofTered and the position of a business in the marketplace, but not on the 
regulatory history of the firm providing those services. 

The first issue arises when telephone companies provide video programming. As 
noted above, we agree generally with the proposition set forth in your bill that tele- 
phone companies should be barred from buying existing cable companies within 
their service region. 

We also agree that telephone companies should be able to create new video pro- 
gramming capacity in their service areas, subject to significant safeguards. We be- 
lieve, however, that an additional safeguard is needed. The Administration proposes 
that such a video programming service, operated by a local telephone company, 
must make channel capacity available to unaffiliated video programmers on a non- 
discriminatory basis. Tnis requirement should create market opportunities for com- 
peting providers of video services, thereby reducing prices and expanding the diver- 
sity of services available to television viewers. To the same ena, we believe that 
such entry by local telephone companies need not be conditioned upon implementa- 
tion of general interconnection and unbundling requirements. In our view, the es- 
tablishment of the separate video platform, with its concomitant safeguards, would 
permit unbundling and telephone entry into video programming to proceed simulta- 
neously — thus bringing more competition more quickly into the cable marketplace. 

At the same time, we must create a level playing field by achieving genuine regu- 
latory symmetry. That is our second point. Regulation must be based on the services 
that are offered and the ability to compete — and not simply on the labels derived 
from past forms of governmental action. Thus, as telephone and cable companies 
begin to provide the same services, it is important that the open-access tradition of 
telephony be extended generally to all parts of the network that will be providing 
digital services. Accordingly, we propose that the FCC be directed to conduct a pro- 
ceeding within a year oi enactment that would require cable operators to provide 



20 

nondiscriminatory access to other video programmers except when technology, costs 
and market conditions would make that ofTering inappropriate. 

We must remember, as we engage in these actions, that open access is not just 
a matter of regulatory policy. It is bound up, as well, with the basic notion of 
empowerment. A two-way system of broad band communication will allow citizens 
to communicate more effectively with each other and with their government. If, as 
Thomas Jefferson said, information is the currency of democracy, then we can be 
assured, as well, that improved access to information will build and promote the val- 
ues of democracy. 

TO ENCOURAGE FLEXIBLE AND RESPONSIVE GOVERNMENTAL ACTION 

Implementation of these open-access requirements will complete the portrait of to- 
day's information marketplace. Our last principle — to encourage flexible and respon- 
sive governmental action — will frame the portrait of tomorrow's marketplace. 

Central to the Administration's vision of the future is our proposal to create a new 
Title VII of the Communications Act. 

The need for Title VII arises from changes in the information marketplace — and 
the manner in which different models of competition are becoming more and more 
alike. 

Telephony is generally thought of as a switched network of narrowband voice com- 
munication. Its great value lies in its flexibility. Anyone on the network can connect 
to anyone else. In fact, we are close to fulfilling our vision of a universal network. 
Although more must be done before we can declare victory, still it is notable that 
over 94 percent of American homes have a telephone. 

Video services, captured most notably in the regulation of cable, are thought to 
be different. Flexibility is quite limited and communication, one-way. But wider 
bandwidth permits more information to flow across the networks, bringing broad- 
cast programming and cable networks to about two-thirds of American homes. 

Traditional regulation has not only treated these two industries differently, it pro- 
hibited them from comf)eting with one another. 

As I mentioned earlier, the information marketplace is, however, rapidly bringing 
these two models together: offering the prospect of switched networks combined 
with broadband capacity. That would permit, for example, interactive exchanges of 
data, even ftall-motion video, between any two users of tne network. 

There is, however, no current regulatory model designed to oversee a company 
that combines cable and telephone — and possibly other data, voice and video trans- 
mission services — into an integrated package of services delivered over the same fa- 
cilities. 

The purpose of Title VII, therefore, is to ensure that regulation matches the mar- 
ketplace and that, as the marketplace changes, outmoded and unnecessary forms of 
regulation do not limit its growth and expansion. Thus, Title VII responds to the 
changing marketplace by providing a future-oriented approach tnat is both 
probusiness and pro-consumer. 

Let me explain briefly how Title VII will work. To be eligible, a firm must ofTer 
two-way, broadband, switched digital transmission services to at least 20 percent of 
its subscribers in a state. Once certified, a firm would be subject to Title VII regula- 
tion for those advanced services and other services delivered over those same facili- 
ties. Title VII would be designed to ensure that competing regulations at the federal 
and state levels do not impose confiicting or duplicative regulatory obligations. Con- 
flict or duplication could arise, for example, if the separate obligations of telephone 
regulation, which includes Title II of the Communications Act plus state super- 
vision, were added to the obligations of cable regulation, which includes Title VI of 
the Communications Act plus local franchise regulation. 

Entry into Title VII would not, however, eliminate the normal public-service obli- 
gations that the Administration believes should be applicable to information car- 
riers, including open and nondiscriminatory access, universal service and inter- 
connection. In addition, rate regulation for firms that have market power would con- 
tinue. 

It is important to note that Title VII is not designed as a general displacement 
of state authority. Although the FCC would have final regulatory responsibility for 
firms that provide Title VII services, states would continue to have substantial over- 
sight responsibility, subject to FCC models and guidelines for the provision of Title 
VII broadband services. 

In sum, a new Title VII would provide unified, symmetrical treatment of providers 
of two-way, broad band services. It would provide important incentives to invest- 
ment, competition, open access and universal service — while constructing a struc- 



21 

ture that will stand the test of time. For these reasons, I urge the Committee to 
include Title VII in its legislation. 

CONCLUSION 

In my testimony today, I have outlined the basic principles of the Administration's 
legislative proposal. But, before I conclude, I want to direct myself to another issue: 
Wny? Why is the Secretary of Commerce so concerned with the creation and use 
of the National Information Infrastructure? 

It's not just because, as I noted at the outset, the Commerce Department has tra- 
ditionally oeen involved in the formulation of telecommunication strategy. 

As Secretary of Commerce, my concern is the businesses and communities and 
workers of the United States — and about how all of us will remain competitive in 
the global economy. Because the National Information Infrastructure is not about 
technology or even technology policy — it's about how we make our nation competi- 
tive in the 21st Century. 

Consider, for a moment, the nature and size of the information marketplace. The 
information marketplace, by one definition, now constitutes about 10 fiercent of our 
domestic economy. That includes cable, telephone, the manufacturers of tele- 
communications equipment, broadcasting, programmers and producers, computer 
hardware and software — a panoply of diverse information products and services. 
And those business suppKjrt more than 4.5 million jobs in the United States. 

But even this understates the real impact of the information revolution. By one 
estimate, two-thirds of U.S. workers are in information-related jobs. That means 
that the ripple effects on American industry will be important — manufacturers 
using high-speed data transmission to connect different parts of their production cy- 
cles; small businesses made more competitive by their ability to work, in real time, 
with suppliers and vendors; groupware in offices that permit teams of workers to 
take responsibility for collaborative ePTorts. In short, American companies and their 
workers nave a new tool to use in their continuing struggle for global success. 

Competitiveness at home will tran.slate into American success abroad. Consider 
the success we currently enjoy in the export of telecommunications equipment, 
packaged software and television programs and films. 

These opportunities are growing around the world. The development of the Na- 
tional Information Infrastructure, though legislation like S. 1822, will help to ensure 
that we maintain — and gain — world leadership in the global information market- 
place. 

And that success will come home — to our business, to our communities, and to our 
workers. 

It is a cliche, of course, to say that the future is hard to see. We do not know 
today which imaginative technologies will spark enduring demand — both here and 
abroad. We cannot foresee precisely how the new information highways will link 
millions of Americans — or what uses our people will make of it. 

But we do know that the future requires a government that is responsive, a pri- 
vate sector that invests in new products and services while competing fairly in an 
open marketplace, and a citizenry that has access to information, but is not divided 
between information "haves" and "have nots". 

S. 1822 will help us reach those goals. That is why I welcome the opportunity to 
appear before you today — and why I look forward to working with you towards the 
enactment of the Communications Act of 1994. 

Thank you. 



APPENDIX— COMMUNICATIONS POLICY REFOR.MS 

On January 25, 1994, in his State of the Union address, President Clinton called 
on Congress to pass legislation in 1994 to create an "information superhighway." 
The Administration began this effort in September 1993, when Vice President Al 
Gore and Secretary of Commerce Ron Brown announced the Administration's Na- 
tional Information Infrastructure (Nil) initiative. In doing so, they established an 
agenda for a public-private partnership to construct an advanced Nil to benefit all 
Americans. In subsequent testimony, speeches, and policy papers, the Administra- 
tion has proposed legislative and administrative reform of telecommunications pol- 
icy, based on the. following fundamental principles: 

• Encouraging private investment in the Nil; 

• Promoting and protecting competition; 

• Providing open access to the Nil by consumers and service providers; 

• Preserving and advancing universal service to avoid creating a society of infor- 
mation "haves and "have nots"; 



22 

• Ensuring flexibility so that the newly-adopted regulatory framework can keep 
pace with the rapid technological and market changes that pervade the tele- 
communications and information industries. 

TTie Administration believes with many in Congress that legislative reform of tele- 
communications policy is essential to meeting these goals, in order to bring the ben- 
efits of advanced communications and information services to the American f>eople. 

For many years, government regulation assumed clear, unchanging boundaries 
between industries and markets. This assumption sometimes led regulators to view 
and regulate firms in various industries differently, even when they offered similar 
services, and to address the threat of anticompetitive conduct on the part of some 
firms by barring them from certain markets and industries. 

A new approach is needed. Even if the lines between industries and markets were 
clear in the past, technological and market changes are blurring and erasing them. 
Regulatory policies that are based on such perceived distinctions can harm consum- 
ers by impeding competition and discouraging private investment. In light of these 
realities, the Administration is committed to removing unnecessary and artificial 
barriers to participation by private firms in all communications markets, while mak- 
ing sure that consumers remain protected. 

In seeking to pass legislation to meet these challenges, the Administration is 
grateful to Chairman HoTlings and his colleagues on the Senate Commerce Commit- 
tee for their efforts on S. 1822, which addresses many of the Communications Act 
issues that are most important to the development of the NIL The fundamental 
principles underlying the Administration's legislative telecommunications reform 
proposals are fully consistent with those reflected in S. 1822. The Administration 
also acknowledges, and has largely supported in testimony, the bold reforms pro- 
posed in H.R. 3626, the legislative initiative to reform the AT&T consent decree un- 
dertaken by Chairmen Brooks and Dingell, and H.R. 3636, develof)ed by Chairman 
Markey and Congressman Fields. 

Because the Administration supports the general approach and many of the exist- 
ing provisions of S. 1822, the provisions of that bill serve as a framework for sum- 
marizing below some features of the Administration's proposals that differ from S. 
1822. 

ISSUES FOR WHICH THE ADMINISTRATION HAS SUPPUED DRAFT LANGUAGE 

The following three issues are of major importance to the Administration, which 
has supplied draft legislative language that addresses them. The Administration is 
receiving feedback from interested parties on the draft language it has presented, 
and looks forward to working further with Congress in addressing these issues. 

• Title VII — The Administration strongly urges supports a unified regulatory re- 
gime for advanced services as detailed in its Title VII proposal. Such a regime would 
establish a streamlined, coherent regulatory structure that would treat similarly sit- 
uated entities the same while preserving important public interest goals, such as 
broad interconnection and open access requirements and universal service. 

• Interconnection and Unbundling Requirements for Local Exchange Carriers 
(LECs) — As S. 1822 recognizes, interconnection to, and unbundling of, LEC monop- 
oly services are key to promoting competition in local exchange services. In light of 
the importance of these factors in developing competitive local telecommunications 
markets, the Administration believes that the interconnection and unbundling re- 
quirements should be more specific, as in the draft language presented by the Ad- 
ministration. 

• Open Access Requirements for LECs and Cable Operators — In order to promote 
competition and diversity in the flow of ideas, the Administration proposes to direct 
the FCC to conduct a proceeding within one year that would require cable operators 
to provide nondiscriminatory access to other video programmers, except when tech- 
nology, costs, and market conditions would make such an offering inapprnpriate. 

OTHER COMMUNICATIONS ACT ISSUES 

S. 1822 addresses comprehensively reforms to the Communications Act of 1934, 
which governs generally the activities of common carriers, cable operators, and 
broadcasters, and the Modified Final Judgment, which instituted the AT&T divesti- 
ture and governs the activities of the Bell Operating Companies (BOCs). We first 
discuss Communications Act issues, in the order they are presented in S. 1822, and, 
in the following section, discuss MFJ issues. 

• Universal Service — The Administration strongly supports the emphasis and im- 
portance placed by S. 1822 on promoting universal service. We fully agree with 
Chairman HoUings and the other co-sponsors of this legislation that ensuring that 
universal service goals are met as we move into a technologically advanced and com- 



23 

petitive telecommunications marketplace should be a bedrock principle of public pol- 
icy. 

We do, however, have some suggestions for modifications in S. 1822'8 provisions 
on this issue. In general, the Administration believes that universal service provi- 
sions in legislation should provide more general guidance to the FCC and the states. 
In particular, we are concerned that the detailed provisions now in S. 1822 may un- 
necessarily limit the mechanisms that the FCC and the states can use in promoting 
universal service goals, such as the current Universal Service Fund and "Lifeline 
and "Link-Up America" programs. For example, all of these were developed jointly 
by the FCC and the states, and involve federal support (through charges assessed 
interstate carriers), but none involve the states "distributing" funds as reouired by 
S. 1822. We believe that the FCC and the states should have sufficient flexibility 
to design a universal service system that best meets the critical goals and policies 
that the bill establishes. 

• Public Access — Both S. 1822 and the Administration recognize the importance 
of the national information infrastructure in the provision of essential and socially 
desirable services to the American public. The provisions of S. 1822 impose a duty 
on all telecommunications carriers, which as defined in the bill include a broad 
range of large and small service providers, to make services available at preferential 
rates to a wide varieW of entities — including state and local governments, many 
public and not-for-profit entities, and others. A very broad legislative requirement 
for preferential rates could have unintended consequences (e.g., on the rates charged 
to most consumers). We reconrunend that the FCC be directed to examine this issue 
in a public inquiry and, subsequently, a rulemaking proceeding. The FCC would 
consioer the tarifiing of preferential rates for interstate services for certain types 
of subscribers and ensure that standards are in place to permit uniform interconnec- 
tion to the Nil. 

• Expansion of Title II Regulation — S. 1822 treats all "telecommunications car- 
riers" — defined broadly to include common carriers and many private carriers — as 
common carriers, which would subject for the first time a broaa class of firms (pri- 
vate carriers) to Title II regulation The Administration is concerned that this ap- 
proach may cause unnecessary regulation. 

• Relations With The States — As the Administration has noted, the states have 
a crucial role in protecting ratepayers and addressing economic and technical infra- 
structure issues in their areas. However, when national interests are at stake in re- 
alizing the benefits of an advanced, interconnected Nil, particularly throu^ local 
competition, national policies, with limited preemptive effect in a few areas, are nec- 
essary. 

(a) Entry. — In order to realize fully the benefits to consumers of increased 
competition in telecommunications, state-imposed barriers to entry in tele- 
communications markets should be preempted immediately, not after two years 
or the implementation of the new universal service rules, as S. 1822 currently 
provides. Competition will take time to develop even if entry barriers are 
dropped immeoiately, and such development will not threaten universal service 
in the near term. 

(b) Rates. — Rate regulation of new entrants and other firms that lack market 
power is both unnecessary and can serve as a powerful deterrent to the develop- 
ment of a truly competitive marketplace. State regulation should be preempted 
for the rates for services of any firm that the FCC finds to lack market power, 
althou^ states should be permitted to petition the FCC to retain or regain au- 
thority to regulate such rates. This approach for rate regulation is substantially 
the same as passed by Congress in the last session for commercial mobile serv- 
ices, as codified in Section 332(c) of the Communications Act. 

• Participation of Utilities — S. 1822 would permit electric, gas, water, and steam 
utilities to provide telecommunications services, notwithstanding any other provi- 
sion of law and subject to regulatory safeguards imposed by an appropriate agency. 
The Administration generally supports open entry in the provision of telecommuni- 
cations services. However, it is also sensitive to the concerns underlying the Public 
Utilities Holding Company Act, and it is reviewing the implications of removing the 
restrictions that currently block the entry by utilities subject to the Act into tele- 
communications. 

• Imposition of Unbundling Requirements — S. 1822 would apply detailed 
unbundling requirements to all "telecommunications carriers," which are defined 
broadly to include all common carriers and many private carriers. Although the 
unbundling requirements should be strengthened, as discussed above, they should 
apply only to LECs (which have market power in local services), not to all tele- 
communications carriers, which, as definea in the bill, would include long distance 
companies, cellular carriers, competitive access providers, and some private carriers. 



24 

• Forbearance — The Administration supports the general approach of S. 1822 in 
permitting the FCC the discretion to forbear from unnecessary regulation. We rec- 
ommend, nowever that the specific provisions of S. 1822 regarding forbearance be 
modified to authorize the FCC to foroear from imposing, or to tailor the application 
of. Title II obligations on the basis of whether a carrier has market power, rather 
than the additional factors now in S. 1822 (i.e., whether full application of such an 
obligation is unnecessary to ensure that charges and practices associated with a 
service are just and reasonable and to achieve the goals of the Act, and whether 
forbearance is in the public interest and protects consumers). 

• Video Platform Requirements — S. 1822 does not require LECs to provide video 
platforms so that unaffiliated programmers have nondiscriminatory access to their 
transmission facilities. The bill should be amended to include a specific video plat- 
form requirement for LECs offering video programs in their service areas. (As noted 
above, the bill should also impose open access obligations on cable operators.) 

• Unbundling and LEC Entry into Cable — S. 1822 would delay LECs' entry into 
cable until implementation of its general interconnection and unbundling require- 
ments, as well as a separate subsidiary requirement. The Administration believes 
that LECs' entry into cable should be conditioned on their implementation of safe- 
guards more specifically directed to the provision of video services — that is, estab- 
lishment of a video platform and use of a separate affiliate for video programming. 

Anti-Buyout Provision — The Administration supports the general approach of S. 
1822, which bars acquisitions by telephone companies of cable systems within their 
service areas (and vice versa), with limited exceptions. However, the Administration 
supports permilling the FCC to modify such a ban 5 years after enactment, in light 
of developments in the marketplace or technology. Moreover, the Administration 
supports a limited exception for shared use of the cable "drop wire," because this 
could facilitate the delivery of broadband services to the home with little threat of 
anticompetitive effects. 

• Franchise Requirements — Local franchise obligations should not apply to the 
video platform operations of LECs and cable firms. Under S. 1822's current provi- 
sions, LECs offering video services expressly are treated as cable operators, thus 
subjecting them to local franchise requirements, and cable systems would not be re- 
lieved of such obligations even if they effered video platforms (as the Administration 
supports). 

• Separate Subsidiary Requirement for LEC Video Operations — While the Admin- 
istration supports a separate subsidiary requirement for LEC provision of video pro- 
gramming, tne relevant provisions in S. 1822 are overly detailed and infiexible. 
Most of these details are more appropriately handled by the FCC subject to Con- 
gressional policy direction and oversight (the approach in the Administration pro- 
posal). 

• Broadcast Initiatives — S. 1822 mandates several FCC proceedings to alter or re- 
examine rules governing broadcasters. The Administration has stated that it favors 
FCC reexamination of broadcast regulations to ensure broadcaster participation in 
the Nil. It believes that the FCC should conduct such a reexamination before enact- 
ment of specific legislation directing the FCC to modify its rules. 

MFJ ISSUES 

InterLATA Services 

• DOJ Authority Over BOC Participation in the InterLATA Services Market — 
DOJ, like the FC(J, should have authority to rule on whether the BOCs are able 
to enter the interLATA market, as is the general approach of H.R.3626. DOJ has 
substantial expertise in determining the comp)etitive conditions in 
telercommunications markets in which the bOCs can or could participate. 

• Standard for BOC Entry into InterLATA Services — The Administration sup- 
ports an approach to permitting BOC entry into the interLATA services market that 
includes both unbunaling and separate affiliate provisions. That approach differs 
from that of S. 1822, which, for in-market entry, requires, among other things, ac- 
tual and demonstrable competition to the BOCs local services. 

• "Incidental" Long Distance Services — The Administration supports an imme- 
diate and limited exception to the prohibition of the provision of long distance serv- 
ices incidental to BOC provision of wireless, cable television, and certain other serv- 
ices. 

Manufacturing 

• Domestic Content Requirements for BOC Manufacturing — The Administration 
opposes the provisions of the bill that establish domestic content requirements for 



25 

BOC manufacturing of telecommunications equipment. Such requirements raise se- 
rious questions under NAPTA and GATT. 

• Standard for BOC Entry into Manufacturing — In addition to the safeguards of 
S. 1822, the Administration supports the application of safeguards before BOC entry 
into manufacturing that include a notification-and-waiting-period procedure under 
which a BOC would submit relevant information about its proposal to the Depart- 
ment of Justice, which could investigate and sue to enloin the proposed entry. 

The Chairman. Very good, Mr. Secretary. We appreciate your 
suggestions and your support of the measure. Right to the point 
with respect to your suggested title VII add-on, we have been look- 
ing at that since it has been furnished. One misgiving we would 
have, perhaps, is that it is optional. We never have had the regu- 
latory regime determined by the regulated. It is really determined 
by the policy itself. 

And we really postured this on the premise of service. If you are 
a common carrier providing common carrier service, say under title 
II, cable service under title VI, and your title VII could finally re- 
sult, under our section 230(h) where we give flexibility to the FCC, 
the ultimate is there as you suggest, in title VII. But it is not there 
yet, and to come in with that option this early I think would be 
a mistake. 

But I do like your emphasis, Mr. Secretary, relative to the uni- 
versal service part. This has particularly been touched on by Vice 
President Gore with respect to the information superhighway, 
where rather than control, it is uncontrolled where it leads us to 
everyone. To assist in that connection to everyone, the public enti- 
ties, the schools, the health institutions, the libraries, and every- 
thing else have been provided for in here. The other measures with 
respect to manufacturing information services, privacy rights being 
protected, and otherwise are all included. 

I like the show we have here this morning in attendance. We are 
going to use the clock and try to make sure we get around to every- 
body, because we also have our Chairman of the FCC and two 
other outstanding witnesses. Let me yield now to Senator Dan- 
forth. I have got the list here in the order in which they appeared, 
so we will follow it. 

Senator Danforth. Mr, Secretary, the most difficult issue that 
we are facing, and I think the most contentious issue, has to do 
with the circumstances under which the Bell companies could get 
into long-distance service. Do you believe that there is a difference 
of position between the bill that Senator Rollings and others have 
introduced and the administration's position with respect to com- 
petition? 

Secretary Brown. Limited differences. As I indicated in my oral 
testimony a few moments ago, and as my written testimony points 
out, we would suggest that the VIII(c) test would be sufficient. We 
believe that there are no differences that cannot be worked out 
through the legislative process. We have articulated that position 
for a couple of months now. Senator Danforth, and believe that it 
is adequate to bring about the results that we would like to see 
take place. 

Senator Danforth. Well, I mean, our view is that it is not suffi- 
cient to have a theoretical possibility of competition. 

Secretary Brown. Well, I am not sure 



26 

Senator Danforth. But rather there has to be real competition 
that has to actually exist. And it would seem to us — and iust 
speaking for myself, I think it would seem that it would be abso- 
lutely essential that competition be actually established rather 
than something that is theoretical but not real. 

Secretary Brown. Senator Danforth, we have as one of our glid- 
ing principles real competition. We believe that that is best for con- 
sumers; we believe that it can encourage investment. There is al- 
ways that balance in our desire to encourage investment. After all, 
it is the private sector that is going to build and operate this na- 
tional information infrastructure. Our judgment was that the ac- 
tual competition test would actually be subsumed in the provisions 
of VIII(c). We acknowledge that there is a legitimate debate and 
discussion about that. We are anxious to engage in that as the 
process moves forward. 

Senator DA^fFORTH. And by that, you mean that you would at 
least be receptive to discussions with us as to how this is formu- 
lated? 

Secretary Brown. Yes, that is correct. Senator. We believe that 
the DOJ test would look at the real circumstances, at real competi- 
tion. We believe that VIII(c) actually does that, provides for that 
presently and has provided for that in the past. 

Senator Danforth. Thank you, Mr. Chairman. 

The Chairman. Thank you. Senator Exon. 

Senator ExON. Mr. Chairman, thank you very much. 

Mr. Secretary, let me see if I can get you to expand a little bit 
more. I listened very carefully to your opening statement and I 
want to read it through again. And maybe you could follow up on 
some of the comments made by Chairman Rollings and Senator 
Danforth. 

Let us talk a little bit more about this open access, universal 
service, level playing field, and all of these wonderful sounding 
things that I think we can all agree to. But we get down to the 
nitty-gritty of some of this, especially as it affects rural America 
that I as one Senator and others have indicated are very much con- 
cerned about. 

I believe you said something about opening local service, and I 
think you also used the phrase "everyone connected to everyone 
else," or something along those lines. I think what this basically 
says is if we are going to have a universal communications system 
we have to break down some of the barriers that we now have. 

You know, that having been said, let me say that what do we do, 
though, and how do we have any penalties whatsoever, imagined 
or real, with regard to those who do not provide local service or 
those who wish to pick cherries, but not just the ripe ones and not 
the ones that are not so ripe. It seems to me that we have got to 
be very careful here that when we talk about opening up all of 
these services that that might be well and good for the people who 
live in a metropolitan center such as Washington, DC, New York 
City, and Philadelphia, they might not be quite as good for those 
in rural America where the cherries are not quite as ripe. 

If we are going to have a universal communications system and 
we have to include everybody, how do we do that and what prob- 
lems do you see in that area? 



27 

Secretary Brown. Well, Senator Exon, I share the concerns you 
expressed and that Senator Stevens expressed earlier. We want to 
bring more services to rural America. We think the way you bring 
more services is to encourage competition to give some incentive to 
those who would like to provide those services to come in and not 
to put up barriers that would discourage them from coming in and 
providing that kind of competition. 

We believe that S. 1822 takes giant steps, as I indicated, in that 
direction. We made what we think are modest suggestions that we 
think provide extra incentive for private investors to come into 
rural marketplaces and do not cause them to shun those market- 
places. 

We indicated early on, Senator, that our principal goal, maybe 
the most important goal, is universal services, making sure that 
through incentives, through competition, through the legislation it- 
self and the work of the Federal Communications Commission that 
that kind of universality is assured. 

Senator Exon. I think you have heard some of the comments 
around the table by several rural Senators, including the Senator 
from Alaska, that I think were directly on point. And I also believe 
that someone made the point that we had better tie this down as 
much as we can. I believe Senator Stevens mentioned that. It 
seems to me, though, that we can only do so much in a piece of 
legislation and we cannot dot every "i" and cross every "t." Do you 
in the Department have the feeling that this Senator has, at least, 
that some of the nitty-gritty details, fairness, access, who can do 
what, are going to have to be resolved, at least in some important 
part, by the Federal Communications Commission? 

Secretary Brown. Yes, we clearly do. Senator Exon. If you can 
see if there is any tilt in our approach it is a tilt toward the Fed- 
eral Communications Commission. We think that allows a great 
deal more flexibility. It does not lock us in concrete to some prin- 
ciples that might in fact result in unintended consequences. It is 
one of the reasons why we are urging consideration of title VII, be- 
cause we believe that is another step toward providing that kind 
of flexibility and trying as much as we can to anticipate new tech- 
nologies. 

As far as your concern about rural communities, as I have indi- 
cated, we share those concerns but we want to make sure that 
those communities have access to wireless and PCS and satellite 
and other technologies as they evolve. And therefore, we want to 
provide maximum incentives for the private sector to make those 
kinds of investments and those kinds of choices. 

Senator ExON. Mr. Secretary, you and your Department in my 
view have done a very good job with regard to enhancing the avail- 
ability of education. And I think education is going to be one of the 
primary beneficiaries with regard to our new systems. The commit- 
tee has created the so-called Hollings Center to disseminate infor- 
mation to American industry about advanced of manufacturing 
techniques. Could a similar model, for example, be studied that 
would be devoted to developing several regional centers of excel- 
lence to be used to help to distribute telecommunications informa- 
tion and training to America's teachers and their students? 



28 

Secretary Brown. Yes, that is certainly possible, Senator. With 
me today is Larry Irving, Assistant Secretary of Commerce, who 
runs NTIA — National Telecommunications and Information Admin- 
istration. One of the things that we are doing is just that kind of 
activity, trying to make determinations about what works best as 
far as delivery of health care services, delivery of education serv- 
ices, through a so-called testbed operation, making sure that we do 
everything we can from the perspective of the Federal Government 
to encourage investment. 

In some ways, what we can do through some of these programs 
is to really drive demand to make sure that potential investors un- 
derstand that there is demand out there in the area of education 
and health care and libraries and others, and that is one of the 
goals, clearly, of 1822; also one of the goals of the administration's 
principles. 

Senator ExoN. My time is up. Could I, Mr. Chairman, indulge 
him for just a brief comment on the Rural Electrification Adminis- 
tration? 

Their telephone systems have got to play a role in this on some 
kind of a level playing field to help rural America. Is that being 
studied by your department? 

Secretary Brown. Yes, it is, and by the Federal Communications 
Commission. 

Senator ExoN. Thank you. Thank you, Mr. Chairman. 

The Chairman. Very good. Senator McCain. 

Senator McCain. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary, and I think you have made a very excel- 
lent statement and I support this legislation, certainly, in principle. 
It is time that the Congress and the executive branch resurned 
their rightful role in making these major decisions instead of giving 
them to the judicial branch where so many of these important deci- 
sions have rested for so long. 

As regards to the tilt toward the FCC that you just mentioned 
in regard to Senator Exon's question, I agree that the FCC should 
play a very important and vital role. And I certainly do not expect 
the Congress or this committee to micromanage those policies. At 
the same time, I would hope that that tilt is not too severe because 
clearly, after abrogating our responsibilities to the iudicial branch 
we do not want to then give them over to a regulatory body, at 
least as far as policymaking is concerned. I am sure you agree with 
that. 

Secretary Brown. I would absolutely agree with that, Senator 
McCain. The tilt I was talking about was a tilt that would recog- 
nize the dynamic nature of this sector of the economy, how fast it 
is changing. Product life cycles which used to be 10 years are now 
18 months, and taking that into consideration it just occurred to 
us that the legislation, the Congress, ought to set the parameters, 
ought to put stakes in the ground, buoys in the river, to try to give 
guidance. But the FCC ought to have the ability to adapt to 
changes which we know are coming. 

Senator McCain. Thank you. And as you say, this is a very ro- 
bust industry with, in my view, robust competition. And that leads 
me to a concern that has been voiced by many about the entry of 
the RBOC's into the manufacturing aspect of telecommunications. 



29 

Some have viewed with concern that this could lead to concentra- 
tion and diminished competition within the U.S. manufacturing 
sector. Is that a concern of yours, Mr. Secretary? 

Secretary Brown. We do not believe that that would be the re- 
sult, Senator McCain. We favor permitting RBOC's entry into man- 
ufacturing, but we believe that one additional safeguard is impor- 
tant, a notification and waiting period procedure. That is a proce- 
dure that is contained in the House bill. We think it is an impor- 
tant safeguard. I think it is one that would meet the concern that 
you express. 

While postentry safeguards can be important, they are not al- 
ways enough in all market circumstances. And therefore, we would 
suggest, as I do in my written testimony, that modification. 

Senator McCain. Specifically in regards to opening the local loop, 
what benefits do you see accruing to the consumer? 

Secretary Brown. We see lower prices, lower cost for the 
consumer. The experience in this sector of the economy has been 
when you permit and promote competition and you encourage com- 
petition, in fact services improve and costs go down and therefore 
the consumer benefits. We would think that the same would apply 
there as would apply to the changes that were made in delivery of 
long-distance services. 

Senator McCain. As you know, the bill mandates services at 
preferential rates be extended to libraries, hospitals, schools, and 
other public entities. I believe such services should be extended to 
Native American government entities. Would you consider that 
also? Because clearly I think they are deserving of the same treat- 
ment. 

Secretary Brown. We certainly would give that consideration. 
Senator McCain. 

Senator McCain. Thank you, Mr. Secretary. Finally, your experi- 
ence and mine has been concerning legislation before the Congress 
that sometimes when it is very complicated and hard for a lot of 
Members to understand there is a reluctance to support omnibus 
pieces of legislation. The banking reform bill comes to mind and 
other attempts made at reforming or modernizing telecommuni- 
cations legislation has been attempted before and failed. 

Are you concerned about this legislation being as complex as it 
is, raising concerns and fears on the parts of Members of Congress, 
especially those who are not intimately familiar with the issues as 
to jeopardizing its chances of passage? 

Secretary Brown. No, Senator, I am not. I think sometimes we 
are called upon to deal with complex issues. I think this action is 
long overdue. Sixty years is a long time to wait when in fact tele- 
communications is exploding, not only in our country but all over 
the world. And I would hope that the complexity of the legislation 
would not deter those considering it from giving it careful consider- 
ation, fi-om understanding its importance. 

And its importance, in my judgment Senator McCain, goes well 
beyond just telecommunications. It is an area that can make our 
Nation more productive and more competitive. As Secretary of 
Commerce I am obviously concerned about our ability to compete 
in this difficult global marketplace. 



30 

We have got a lead in telecommunications technology. I want to 
see that lead enhanced through investment. I want to see it en- 
hanced because I believe that when we get telecommunications to 
small- and medium-sized companies they are better able to grow 
and employ more American workers and to compete in the export 
marketplace. 

So, I think its importance goes way beyond just this sector of the 
economy and therefore I would hope that the complexity would not 
be a barrier to prompt movement of the legislation to its prompt 
enactment and to its having the kind of effect on the economy that 
I believe it can have. 

Senator McCain. I assume from your remarks that this legisla- 
tion would be your highest priority. 

Secretary Brown. It certainly is a very high priority of the ad- 
ministration and certainly one of the highest priorities of the Com- 
merce Department. 

Senator McCain. Thank you, Mr. Secretary. Thank you very 
much, Mr. Chairman. 

The Chairman. Thank you. Senator Burns, 

Senator Burns. Thank you, Mr. Chairman. Just, I guess, a cou- 
ple of comments here. And I guess most of us that represent rural 
areas have the same reservations that Senator Exon has for his 
State of Nebraska, that we know that competition in the rural 
areas is pretty much nonexistent, and has not been developed to 
the point where it offers any meaningful advantages to the consum- 
ers in the rural areas. But that may be coming because of new 
technologies and new ways of distributing the signal and this type 
of thing. 

And I also would suggest to Senator Exon that we have a tele- 
communications center that is going into Montana State University 
that will teach teachers new technologies and new tools and to dis- 
seminate information to teach the people to use those new things. 
And that has all been done by the college, and we think it has to 
start there in that particular part of our education process. 

Mr. Secretary, the bill proposes new universal service regulations 
to support rural and intercities telecommunications be adapted be- 
fore any open interconnections and local competition rules are im- 
plemented, and it also proposes that both be implemented before 
the regional Bell systems are permitted long distance entry. Is it 
your view that this is the right sequence of making these changes? 

Secretary Brown. I indicated. Senator, in my oral testimony, it 
is also indicated in the written testimony, that we think the se- 
quencing is unnecessary. We think they can take place in a parallel 
vein, and that in fact would encourage competition and encourage 
investment. 

It is certainly a matter to be discussed and debated. We under- 
stand that there are fairly strong feelings on both sides of that 
point. We tend in this area to really push for competition, to push 
for things that encourage investment. We think the sooner that we 
can get incentives for investment the sooner we can build out the 
information infrastructure, and that is why we have taken the posi- 
tion that we do not believe that that kind of sequencing is nec- 
essary. 



31 

Senator Burns. Should the residential areas, including economi- 
cally disadvantaged areas of our Nation's cities and the rural areas 
be included in the market power determination for telephone ex- 
change and exchange access service markets? In other words, 
should all of that be considered whenever we start determining 
market power? 

Secretary Brown. It certainly should be considered. It should be 
one of the factors. And if I could go back to your previous question, 
I want to make it clear that unbundling needs to precede move- 
ment into the long-distance marketplace. 

Senator Burns. OK And then I guess I would suggest that I am 
very much in favor of your title VII. I am very supportive of your 
title VII. I am not real sure. It may not seem to be the key to this 
particular phase of policymaking, but I think it will be, on further 
down the line. And so I appreciate that and I certainly support 
that. And thank you for coming today. 

That is all I have, Mr. Chairman. 

The Chairman. Mr. Secretary, the provision of S. 1822 is that 
the unbundling as well as universal service hearings shall be com- 
menced immediately by the Federal Communications Commission, 
and I think perhaps someone could have characterized your state- 
ment as it has to wait. The truth of the matter is that the Commis- 
sion shall, within 12 months after the date of enactment, issue reg- 
ulations to implement both universal service and unbundling. 

Next is Senator Packwood. 

Senator Packwood. Mr. Chairman, thank you. 

Before I start my questions, Mr. Secretary, let me congratulate 
you on the attitude you are taking toward Japan and telecommuni- 
cations equipment. I think I saw a statement attributed to you not 
too long ago we are willing to go toe to toe with anybody in the 
world if we can have access to the markets. And I saw what you 
said over there. And we are doing very well in telecommunications 
where we can compete, and I appreciate that free trade policy of 
the administration. 

Now, there is a domestic content provision in this bill that closes 
markets to foreign telecommunications. Does the administration 
support that? 

Secretary Brown. We have concerns about it. Senator. There are 
some who argue that there are some GATT problems with that pro- 
vision. We think it needs to be looked at closely. 

We have indicated thus far that we would prefer that that provi- 
sion not be a part of the legislation, but that is not one of our prin- 
cipal positions on the legislation. 

Senator Packwood. Why not? 

Secretary Brown. Because we think there are other things that 
are a part of the program that we have laid out, the priorities that 
we have laid out such as universal service and competition and ac- 
cess and interoperability, and that that provision is not as impor- 
tant as the ones that I have just articulated. 

Senator Packwood. Apart from whether it is GATT illegal or 
not, and I think it is, but apart from that, how could we go about 
the world arguing to open up their telecommunications markets to 
our manufacturers and say "Ah, but now wait a minute. We are 
going to pass a bill and close ours to you." 



32 

Secretary Brown. It is a difficult argument to make, Senator. 

Senator Packwood. Thank you. I appreciate that. [Laughter.] 

Now let us go to universal service. That is a term we all use 
again like in health insurance, universal coverage, we all use it. 
But then we try to find out what it means. What is universal serv- 
ice? Does it mean everybody gets a telephone or does it mean ev- 
erybody gets a telephone with an answering device? Do you get a 
PC and a modem? Do you get access to cable, but only basic serv- 
ice? What do we mean when we say universal service? 

Secretary Brown. What I would like to think we mean, Senator, 
is to understand the opportunities that this approaching national 
information infi-astructure gives us and to do everything that we 
can do within our power to make sure that we do not create a soci- 
ety of information haves and information have nots. To do every- 
thing as you are doing in 1822, as the administration has sug- 
gested, by having a goal by 2000 to make sure that libraries and 
schools and health-care facilities and clinics have access. 

Senator Packwood. That is OK. What about homes? Beyond the 
telephone, what are we talking about? When we say we do not 
have haves and have nots, are we saving the Government is going 
to make sure that there is a certain level of equipment, for lack of 
a better term, that every home shall have? 

Secretary Brown. No, I do not think we are saying that every 
home has to have a certain kind of equipment. But what we are 
committed to is making sure that that kind of information is acces- 
sible to all Americans, and doing everything that we can to make 
sure that we adopt policies that help to make it accessible. I think 
we certainly could not make a commitment that every new tech- 
nology that comes forth has to be in every single home in America. 
I think we can make commitments to make sure that the flow of 
information is free and open. 

Senator Packwood. Well, let me ask you a for instance. I am 
just marginally computer literate. You know, I can type, thank 
goodness, and I can figure out how to work the thing that elimi- 
nates the letter and I can type in another letter. I am not sure I 
need that at home, and I am not sure that universal service should 
guarantee that I should have it at home. But that is on the edge — 
it is not even on the edge of technology anymore. We have several 
of our staffers that do most of their work from home, inputting on 
modems. But is that the kind of thing when you say that tech- 
nically can be done, therefore every home should have it? 

Secretary Brown. No, but I think we have to accept. Senator 
Packwood, that it will evolve over the years, just as it has over the 
last 60 years — 30 years ago we had party lines, and then we had 
rotary dial and then we had touch tone, and I think this is an evo- 
lutionary kind of process. And I think it is very difficult to predict 
what might be widely available. 

One of the things you want to do is encourage competition. When 
you encourage competition, you reduce the costs of new tech- 
nologies and make them more broadly available. So, I do not know 
that you can have a finite definition today, but I do think it is in- 
cumbent upon us to do everything we can to make sure that we get 
as close to our definition of "universal service," whatever it turns 
out to be in the future, as we possibly can. 



33 

Senator Packwood. That is probably a wise amorphous decision, 
and that is probably the way it ought to be left. In this case if we 
try to be precise and say all right, nere in this bill is what we say 
everybody should have, A, B, C, D, E, F, G, and that is it, the tech- 
nology will pass that by in a year. 

Secretary Brown. No question about it. I mean right now we are 
talking about 8-inch dishes that can get just about any bit of infor- 
mation to anyone who has the dish, and I assume the technology 
is going to keep expanding and changing rapidly, and we just ought 
to look for opportunities to make sure that the flow of information 
is free and open and accessible. 

Senator Packwood. Thank you. 

Thank you, Mr. Chairman. 

The Chairman. I thank you. Senator. I think it is pertinent here 
to point out that there is no Federal definition of "universal tele- 
phone service" to date. Traditionally, State regulatory agencies 
have had the primary responsibility for defining and enforcing 
"universal service." The concept of universal service has changed 
over time. At first telephone company operators were employed to 
make telephone connections, later party-line service was considered 
sufficient, next single-line service was considered necessary, and 
today many States require touch-tone service to be made available. 

The definition is expected to continue to evolve as new tech- 
nologies become available and more standardized, and for these 
reasons 1822 does not contain a fixed definition of "universal tele- 
phone service." However, there is a greater need for some Federal 
guidance over the telecommunications network to ensure that a na- 
tionwide seamless network is encouraged. Therefore S. 1822 estab- 
lishes a minimum definition of universal service as basic voice 
grade telephone service. I just wanted to point that out in the 
record at this particular point because I think Senator Packwood 
and the Secretary are right on target there. 

Senator Stevens. 

Senator Stevens. That is a good place for me to pick up, Mr. 
Chairman. 

First, Mr. Secretary, let me congratulate you also, as Senator 
Burns did, for title VII. I do think we should add some concepts 
to this bill, and we have been working with the staffs here on the 
committee to try and work that out. We welcome the input of your 
people. And I notice Larry Irving is behind you. We have a great 
deal of confidence in him too as ne guides your policy with regard 
to NTIA. 

I think that what our main goal should be is that all carriers 
providing the same service should be subject to the same regula- 
tions. Now, if we cannot get that built in here at least in a national 
standard concept, I do not think we will succeed. 

But let me go first to my concept that I like to talk about, and 
that is carrier of last resort, Mr. Secretary. When Mr. Allen, the 
chairman of AT&T, was here last year I asked him about the car- 
rier of last resort, particularly with regard to AT&T's concept of 
coming into Alaska. And I want to read to you his reply, which I 
still think was most interesting. He is a very interesting gentleman 
and I think he contributed a lot to this dialog. 



34 

He said — ^you have got to remember now, I was asking him about 
AT&T's coming into Alaska to compete with Alascom. He said, "We 
are indeed today every place we serve, whether we wish it or not, 
the long-distance carrier of last resort. It is part of our service his- 
tory. I am proud to say we have not abandoned any area in these 
United States. We will come in there on a business proposition that 
we hope is successful, and we have to align our costs appropriately 
and our rates appropriately to do so. But if we come into Alaska, 
you can bet we will serve your customers. And while we will not 
identify ourselves as the carrier of last resort, that is in fact what 
we will be." Because they would be the dominant carrier, they 
would be the carrier of last resort in effect, but not legally. 

Now, I have asked the FCC and I want to ask you also, we have 
a dedicated satellite. My understanding is it will be expiring soon. 
If there is no carrier of last resort legally identified, how are we 
going to fix the responsibility to replace portions of the system such 
as that dedicated satellite? 

Secretary Brown. I think in line with the commitment we have 
made and the commitment made in 1822, we cannot permit that 
to happen. We have to make sure that individuals in rural regions 
and isolated regions have access to adequate information and tele- 
communications services. There are several methods, several ways 
to go about that. You suggested some. We are anxious to engage 
in discussions with you and other members of the committee about 
how to best pursue this goal. We agree with the goal. We think we 
have to give those kinds of assurances to all the American people, 
and we are anxious to find the appropriate method to get that 
done. 

Senator Stevens. I thank you for that, and I think we should all 
look forward to working with you. And I hope we can have some 
what I call consensus meetings instead of hearings somewhere 
along the line, and start talking about the ramifications of what ev- 
eryone is suggesting. And we aid that once in this committee that 
I recall, and it was very successful. I hope we do that. 

I am interested now — let me shift from that to the concept of uni- 
versal service and the question of costs. The bill refers to a reason- 
able share or reasonably identifiable costs in universal services or 
rural services. Now, I was thinking about how to put it to you, but 
right now it appears to me that under that bill if you were to call 
Dutch Harbor where my son has his fishing boat you would pay 
one charge, but if I had called from Anchorage to Dutch Harbor I 
would pay a different cost. 

Because under this bill the States would have the responsibility 
of determining basic interpretations of universal service costs, and 
the reasonably identifiable costs of interstate may be different from 
intrastate costs if you deal with a State like mine. You have got 
to remember that when I call from Anchorage to Dutch Harbor, it 
is the same as your calling from here to Salt Lake City. That is 
still intrastate. Now why should there not be a national definition 
of both universal services and of the cost concepts associated with 
universal services? 

Secretary Brown. Well, first, as you well know. Senator, there 
are a lot of cross-subsidies in our system now, and we have to 
make a determination about how to best protect the interests of 



35 

consumers. One of the things that S. 1822 does and the administra- 
tion has suggested is that we do not allow for spikes in rates. You 
do not allow for these kinds of potential rapid jumps in rates, and 
those can be done both federally and they can be done by — or en- 
forced, rather, by State regulatory agencies. 

Again, we have got to find the right formula to make sense for 
all parts of America. Cost is one of the basic considerations. One 
of the reasons why we are pushing so hard to encourage competi- 
tion is we think that that is a way to reduce costs to consumers. 
There are aberrations, there are probably certain areas of the coun- 
try where you have the kind of situation that you have defined, 
and we have to be creative enough in the legislative process and 
also in the regulatory process to deal with those situations. 

Senator Stevens. I do not want to get too specific, but there is 
an impression here, I think, on the committee that if we pass the 
bill as it is now, that the pools that exist for rate averaging would 
continue. Do you believe that there would still be a series of pools 
that would continue to subsidize universal service under the bill as 
it stands now? 

Secretary Brown. Absolutely there would be, and there would be 
under the administration's view as well. 

Senator Stevens. Let me put just one last comment to Senator 
Packwood and to you. My daughter is now teaching computers to 
grade school students in a grade school in Alaska. We have taken 
the position that our children should become computer literate lit- 
erally by the third grade, and they now can send E-mail to one an- 
other and can use the Internet. We do that because we think we 
ought to come into the 21st century with everyone else, but this bill 
really will determine that, as to whether we can afford it. 

I think if Alaskans can afford this bill, anyone can afford this 
bill, because of the distances within our State. A lot of people here 
think that because of satellites — that the distance on the Earth is 
immaterial because of the distance to the satellites. We find that 
is not so. 

I will leave you with this one comment, Mr. Secretary. When 
Alaskans went over to Siberia and into the Russian Far East and 
started setting up businesses, they could not understand why they 
did not have reliable telecommunications. We finally tracked it 
down, and there were several miles of pre-World War II telephone 
lines in there that had been tied together into the system, and the 
reliability just was not there. Alascom went over and helped them 
straighten that out. 

But that is our problem. We cannot be locked into the 21st cen- 
tury with some of the equipment and the services that we have 
right now that are already, you know, not state of the art. I think 
that rural America depends on this bill more than your realize. 

Thank you. 

The Chairman. Very good. Let the record also show that the 
States requested that they be allowed to choose the carrier of last 
resort and impose that common carrier obligation, and that is the 
language that we included in section 230(d). The States posed that 
language for us. 

Senator Breaux. 



36 

Senator Breaux. Thank you, Mr. Chairman. Let me first thank 
the Secretary for being with us and for his leadership and active 
interest in this issue. I do not think there is anything more impor- 
tant for the Commerce Department than to take the lead in com- 
munications, because nothing else you do is going to be done very 
well without a first-class, world-class communications system for 
this country, and I thank you, Ron, for your active involvement. 

You said — I want to talk about this question of I getting in yours 
and your getting in mine battle that we are fighting here. Long dis- 
tance wanting to provide local service; local companies wanting to 
get into the long-distance service. Right now, as I understandf it, 
there are a number of long-distance companies that provide local 
service, that are getting into local service markets. Teleport, MCI, 
MFS, Sprint, Rochester Telephone, Cincinnati Bell, you can go on 
and on. They are getting into that type of market right now. I take 
it this legislation talks in terms of making sure that universal serv- 
ice will be guaranteed, once that is done, through a fund, they can 
get into that. 

What I want to focus in on is a test for local companies, particu- 
larly the RBOC's, getting into the long-distance service. And on 
page 10 of your testimony you say that the legislation provides that 
the RBOC's can provide long-distance service. Before they can, sev- 
eral preconditions must be met. One is a showing of factual and de- 
monstrable competition. You further say that we would prefer a 
different approach through which the Department would admin- 
ister the current test of VIII(c) of the modified final judgment. You 
make some additional comments about that. 

And that is what I want to focus in on, and I am going to get 
into it with Reed Hundt in a little bit more — in more detail. It is 
my understanding, and I ask if you agree, that the test that we 
have in the legislation — that before that can happen that there be 
actual and demonstrable competition, and we set out three addi- 
tional things that would lead to that — is a new test, one that has 
not been tested in communication law. 

And my fear is that what we are doing is merely creating an- 
other Judge Greene forever situation, because I can think that you 
will see companies come in and say — the RBOC's for instance- 
that, "Yes, we showed there is actual and demonstrable competi- 
tion." Long-distance companies will say, "No, you have not." Both 
of them bring in lawyers and consultants and experts battling their 
position, and then we are off" to court and then some time 5, 10 
years from now the courts are going to say this is actual and de- 
monstrable competition. What is your rationale for your comments 
on this test at this point? 

Secretary Brown. Part of the rationale is a point that you just 
made. Senator Breaux. We think that VIII(c) is an adequate provi- 
sion. We think that, in fact, it subsumes much of what is intended 
by the new language. We would argue that the new language is not 
necessary. 

Senator Breaux. There have been a number of communication 
tests that have been litigated over the years, and court decisions 
spelling out what those tests are have been part of the judicial 
record for a number of years. And some of those tests are the pub- 
lic interest test which has been used for years and the so-called 



37 

Clayton test which dealt with mergers and acquisitions. Then you 
have the existing VIII(c) test which is whether your activity is not 
a substantial threat in the new market that you seek to get into, 
and then we have this actual and demonstrable competition test. 

Where would you place that test in degree of the steps that have 
to be jumped through in order to meet that test? Is it more difficult 
than a public interest test; is it less difficult? Is it more difficult 
than the Clayton test or less difficult? Is it more difficult than the 
existing VIII(c) test or less difficult? Can you put it in a category 
of where it would fit? 

Secretary Brown. Well, Senator, I do not think the problem is 
so much that it is new. We just think that the VIII(c) test is plenty 
broad enough, that it is a good approach, that it is an approach 
that can work. And we would agree with your concern that it might 
promote, the new test might promote unwanted and unnecessary 
litigation. After having said that I think the new test would be sub- 
sumed by VIII(c). It is hard for me to say that it goes further than 
VIII(c), but it certainly is something that we have questions about 
and therefore we have chosen to support the VIII(c) approach as an 
alternative. 

Senator Breaux. Let me ask in a slightly different area. We are 
talking about competition, which I certainly favor. What is the role 
in your perspective, if you have a thought on this, of utility compa- 
nies? What is the proper role for them in this new area of commu- 
nication? 

I am told that some communication companies are involved in 
the construction of fiberoptic lines now, that they only need about 
10 percent of the capacity of those fiberoptic lines. They have a line 
into every house and almost every household in America. If they 
do fiberoptics and they only need 10 percent, that means they have 
90-percent excess capacity. Is there a role for them in this regard? 

Secretary Brown. Well, they are certainly realizing very quickly 
that their communications assets, such as the existing fiberoptic 
and microwave radio networks, could serve as a basis for providing 
commercial telecommunications service. So, there is increasing in- 
terest on their part in doing that. This is a matter that the admin- 
istration has not developed a position on yet, but we are reviewing 
it. We think it is an important issue, and it is certainly is impor- 
tant to those companies who now realize that they have a value 
that they did not previously understand that they had. It is some- 
thing that I think we have to address. 

Senator Breaux. I do not want to get into too many of the details 
but, I mean, are we looking at the possibility of joint ventures or 
mergers? I mean people have some things that other people need. 
I have the information, you have the lines, you have the capacity, 
I have the things I want to sell. I mean is this what we are looking 
at down the road in the future of America? 

Secretary Brown. That is what we are looking at right now, not 
only in the future, and that is why some of these mergers and ac- 
quisitions have taken place for just that reason. That is why it is 
so important, I think, that we legislate in this area at the soon- 
est — at the earliest possible moment, because the private sector is, 
frankly, moving quickly, investing by some estimates between $50 
and $70 billion a year building the information superhighway even 



38 

before we have set the parameters for the development of that in- 
formation superhighway. So, it shows that there is great interest 
in the private sector in getting on with it. 

Senator Breaux. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

The Chairman. Let me just say right here that the VIII(c) test — 
and I am reading it. In fact, we can go back to the original decision 
here of 1982. And I am reading from Judge Greene's decision back 
then in 1982 divesting AT&T. The Tunney act's public interest 
standard permits the operating companies to be barred from a com- 
petitive market only if there is a substantial possibility that they 
will use monopoly power to impede competition in that market. 

Then after a lot of lawyers — you are talking about the lawyers 
entering the market, Mr. Secretary — ^he put in VIII(c) which says: 
"The restrictions imposed upon the separated BOC's by the virtue 
of section 11(d) shall be removed upon a showing by the petitioning 
operating company that there is no substantial possibility that it 
could use its monopoly power to impede competition in the market 
it seeks to enter." 

Now they still say that was vague, even though that was the test 
used by the operating companies. Ameritech — and we will include 
the entire letter in there — wrote both Senator Danforth and others 
here last October 20. 

[The information referred to follows:] 

Letter From William L. Weiss, Cilmrman and Chief Executive Officer, 

Ameritech 

October 20, 1993. 
The Honorable JOHN C. Danforth, 
U.S. Senate, 
Washington. DC 20510 

Dear Senator Danforth: On behalf of the seven regional companies, I am re- 
sponding to the request you put to me and Bob Allen at the hearing on September 
8 to develop a definition of local exchange competition. I hope the following informa- 
tion is helpful to you and the Subcommittee as you continue your deliberations on 
S. 1086. 

In developing a definition of local exchange competition, we must first determine 
the purposes for which such a standard might be used. Tests for competition have 
been develof)ed, as in the cable reregulation legislation, to determine the appro- 
priate level of regulation, of the prices of a telecommunications provider. For exam- 
ple, Illinois law provides the following standard of effective competition which, when 
met, relieves a provider of a service oT certain regulatory pricing burdens: 

"Competitive Telecommunications Service means a telecommunications serv- 
ice, its functional equivalent or a substitute service, which, for some identifiable 
class or group of customers in an exchange, group of exchanges, or some other 
dearly defined geographical area, is reasonably available from more than one 
provider. 220 ILCS 5/13-209. 
This type of test is not appropriate as a test for entry into a market. An entry 
test, based on antitrust principles, must focus on conditions in the market that one 
is seeking to enter. The Modified Final Judgment (MFJ) provides just such a test. 
Recognizing that excluding a competitor from a market harms consumers, the MFJ 
provides that the line of business restrictions, including the long distance prohibi- 
tion, shall be removed when there is "no substantial possibility that a (regional com- 
pany) could use its monopoly power to impede competition in the market it seeks 
to enter." This standard does not require the elimination of the local exchange mo- 
nopoly. Indeed, it assumes the continuation of substantial market power, ii not a 
de jure monopoly. Instead, relief is mandated if there is no substantial possibility 
that any existing monopoly power in the local exchange will impede competition in 
the market the local exchange company seeks to enter. The Court of Appeals has 
interpreted "impeding comjaetition" to mean the ability to increase price or restrict 



39 

output. This means, for example, that there must be a significant threat that the 
regional companies will dominate the long distance market. 

The regional companies believe that existing conditions in today's telecommuni- 
cations marketplace satisfy the test for entry set out in the MFJ. Regardless wheth- 
er the Subcommittee agrees with that proposition, there can be no doubt that the 
unbundling requirements of S. 1086 justify the elimination of the long distance ban. 
It is Amentech's position that the unbundling requirements of S. 1086 reduce bar- 
riers to entry ana eliminate any remaining argument that the regional companies 
could act anti-comp)etitively in the long distance business. 

Predatory pricing by the regional companies in the long distance market is not 
feasible due to the scale economics of long distance carriers such as AT&T, MCI, 
and Sprint, and the fact that the regional companies would start with zero market 
share. Such a pricing strategy would fail because the long distance carriers could 
withstand any losses from matching below cost prices and could not be driven from 
the mariiet. Access discrimination would be imfwssible to implement due to the cur- 
rent equal access regulations in place and the unbundling provisions of S. 1086 bill 
which would make any attempted discrimination much easier to detect. Accordingly, 
the seven regional companies urge the Subcommittee to mandate long distance relief 
in S. 1086. 

For this Subcommittee to establish a new test for long distance entry based on 
market metrics raises several concerns. First, local exchange competition will occur 
at different times for different groups of customers in dilterent geographic areas. 
This has already been the experience in the development of long distance competi- 
tion. To permit entry by the regional companies only to those customer groups and 
geographic areas for which competition exists — whether defined as the existence of 
a substitute service or some specified level of market share — will result in piecemeal 
entry that will not be in the best interests of consumers. This approach will increase 
customer confusion as to what carriers provide such services a at given point in 
time, and could cost consumers millions of dollars in foregone savings that would 
result from full regional company entry. Even worse, delaying entry until some over- 
all metrics is satisfied will delay entry in the moot contestable arena far beyond any 
reasonable time. Ironically, a metrics test has the effect of placing the public policy 
decision of competitive entry into the hands of the incumoent providers who can 
control the entry of competitors into their own businesses by their decision as to 
whether or not, and on what scale, they choose to enter the local exchange business. 
These efTects confiict with the main objective S. 1086 — to facilitate the development 
of universal access to an advanced telecommunications infrastructure. 

In addition, continued or piecemeal exclusion of the regional companies from the 
long distance market would nave a serious impact on the types and quality of serv- 
ices ofTered to consumers. For example, Ameritech has developed the Wisconsin 
Health Information Network (WHIN), linking doctors, hospitals, and insurance car- 
riers in a network that reduces the cost of health care services while increasing the 
responsiveness of the industry to the health care needs of Wisconsin. As the current 
debate over health care attests, this typjc of service is critical to our nation's ability 
to provide quality health care services to all Americans. Other of the regional com- 
panies are offering or are planning to offer similar services. Due to the long distance 
restriction, the regions are unable to serve smaller, less populated areas because of 
the high cost of replicating a network for each area. As a consequence, the benefits 
derived from WHIN will be provided only to people in the larger cities of Wisconsin, 
such as Madison and Milwaukee, while people in less populated areas — those in the 
greatest need of improved health care services — are excluded. Removal of the long 
distance restriction would allow the regions to serve less populated areas using fa- 
cilities based in larger cities, thus extending the full benefits of the network to all 
consumers and reducing the costs to everyone. 

In conclusion, we urge the Subcommittee to recognize that opening all markets 
to all competitors offers the best hope of developing the nation's telecommunications 
infrastructure for the benefit of all citizens and therefore, to amend S. 1086 to elimi- 
nate the long distance ban of the divestiture decree. 
Sincerely, 

W.L. Weiss. 

The Chairman. The modified final judgment provides such a 
test, provides that the hne of business restrictions including the 
long-distance prohibition shall be removed when there is no sub- 
stantial possibility that a regional company could use its monopoly 
power to impede competition in the market it seeks to enter. And 
that is why the bill on page 81 uses that same no substantial possi- 



40 

bility that the Bell operating company or its affiliates could use its 
market power in a telephone exchange and exchange access service 
market to impede competition in the interLATA telecommuni- 
cations service market. 

In addition we included the unbundling plus the substantial com- 
petition, we tried to spell it out for the exact reason, as suggested, 
that may occur, by the distinguished Senator from Louisiana, that 
we may end up with a lot of lawyers. That is what we have had. 
This thing has got a lot of history to it, and that is exactly why 
it was included there in that fashion. And the companies have al- 
ready agreed to the unbundling and if the Chairman of the FCC 
can think of better language, or any of the Senators can, we would 
be glad to include it, but we are trying to get away from what the 
lawyers have been arguing about. We have already had the lawyers 
arguing about the vagueness of this particular provision, and we 
tried to spell it out more specifically for the Commission. 

Senator Pressler. 

Senator Danforth. Mr. Chairman. 

The Chairman. Yes. 

Senator Danforth. Could you just yield for a minute? 

The Chairman. Yes. 

Senator Danforth. I think that the points that have been raised 
by you and bv Senator Breaux, and I attempted to raise them ear- 
lier, are really the nub of the question here. The question is if a 
local telephone company. Bell operating company does have monop- 
oly power in reality, are there, should there be circumstances 
under which it could enter the long-distance market or not? 

My view is the answer to that question has to be "No," that there 
has to be actual real competition for local telephone service before 
the phone company gets into long distance, or else the bottleneck 
possibility is bound to occur. And I do not think that the Secretary 
agrees with that analysis, but I am not sure. And if he does, I do 
not know why we cannot just include it in the legislation. 

Secretary Brown. Well, I certainly respect that view, Senator 
Danforth, and the one expressed by the chairman. It is our view 
that VIII(c), administered by the Department of Justice — a good 
deal of experience as the chairman points out — would achieve the 
purposes of the committee and achieve the purposes of 1822. That 
is the only difference we have. We have the same goal. 

The Chairman. You are suggesting that this be administered by 
the FCC and the Department of Justice? 

Secretary Brown. That is correct. Senator. 

The Chairman. Well, that is the basic difference then. You want 
two entities to start administering communications. 

Secretary Brown. Well, two entities have long been involved. Ob- 
viously, our preference, as I indicated throughout the testimony 
and early on — I did not mention the Department of Justice until 
this moment when it came up in response to the VIII(c) question. 
Our preference obviously is for the FCC to play the lead role. We 
think in this particular area, which has to do with monopolies, 
which has to do with antitrust which, in fact, the Justice Depart- 
ment has more experience with than any other agency of the Grov- 
ernment, that is an appropriate role for them in that narrow in- 
stance. 



41 

The Chairman. But if you are going to get the antitrust lawyers 
over at the Department of Justice, you might as well forget — we 
could pass this bill this afternoon and it would never be adminis- 
tered. [Laughter.] 

Senator Pressler. Well, thank you very much. 

Following up on some of the questions about universal service, 
can insistence on too much universal service result in paralysis? 

Secretary Brown. We do not anticipate that. We think that uni- 
versal service is an appropriate goal. We think balanced with the 
other goals that we have set out such as competition and invest- 
ment, there is the right kind of balance in the equation. 

Senator Pressler. Yes, but could there be some instances — and 
I have always been an advocate of universal service — where this 
emphasis could discourage companies from developing new serv- 
ices? I want companies to flourish and to do well. I want to encour- 
age competition and the entry of a lot of players. But if we impose 
too many requirements for universal service, would that not para- 
lyze some of the expansion in services that might otherwise de- 
velop? 

Secretary Brown. We do not believe it would, Senator Pressler. 
We think that the approach of 1822 would prevent that. We think 
the proposals that we have made certainly tilt heavily toward com- 
petition and investment and doing everything we can from a policy 
perspective to encourage investment, so we do not think that would 
be the result. Senator Pressler. 

Senator Pressler. You mentioned the Department of Justice and 
the FCC. Now, as I understand it, the House and Senate bills differ 
on the role of the Department of Justice. The House would require 
parallel proceedings at the Department of Justice and the FCC be- 
fore the Bell companies could enter long-distance markets. From a 
public administration view, this seems duplicative and unneces- 
sary. At the same time, the Department of Justice has considerable 
expertise in overseeing competition in the telecommunications in- 
dustry. I guess you have given your opinion, but would that not be 
duplicative? 

Secretary BROWN. We do not believe so. We think there is special 
expertise in that area in the Department of Justice. 

Senator Pressler. All right. What role would broadcasters play 
in this new national information infrastructure? 

Secretary Brown. I would assume the same kind of role they 
played over the last many years, being innovators, being primarily 
responsible for assuring universal service, as is the case in radio 
and television today. 

Senator Pressler. One of the major differences again between 
the House and Senate bills is the approach to Bell company entry 
into long-distance services. S. 1822, the Senate bill, would permit 
the Bell companies to provide long-distance service outside their 
markets before providing long distance within their regions. This 
sequence makes sense to me. What is the administration's view? 

Secretary Brown. Well I have spoken. Senator Pressler, to the 
sequencing issue. We do not believe that the sequencing is nec- 
essary. We think that things can take place in parallel fashion. It 
is certainly a matter that I think can be worked through during the 
legislative process. 



42 

Senator Pressler. Now, the administration and in particular 
Senator Gore have made several statements providing an ambi- 
tious program of investment in national information inirastructure 
demonstration projects. In your opinion, is Federal funding nec- 
essary to ensure that public benefits are delivered via the informa- 
tion infrastructure? 

Secretary Brown. Yes, it is, and that was reflected in the admin- 
istration's budget proposals both for fiscal years 1994 and 1995. We 
believe that the National Telecommunications and Information Ad- 
ministration can play an important role in that regard, as I indi- 
cated earlier. 

Senator Pressler. I have some additional questions for the 
record, Mr. Chairman. I am glad that the committee finally will 
pass some legislation. For so long we have held hearings and sent 
signals to the FCC. I hope we do more than send signals. We must, 
if we are going to be a player in this debate. I also hope we do not 

fet such a cumbersome bill that it paralyzes the whole situation, 
think the bill as written is pretty good and I hope we do not get 
too many amendments that basically change it. 

The Chairman. Thank you. 

Senator Robb. 

Senator Robb. Thank you, Mr. Chairman. 

Mr. Secretary, I join in expressing pleasure that you are not only 
here, but have determined to take lead in this area. Obviously, the 
consequences of both action and inaction are very significant. You 
made reference, and several others have made reference today to 
the complexity of this particular legislation, and certainly the obli- 
gation to proceed even though the matters may be complex and 
sometimes difficult to understand. 

I was visited yesterday by the SWAT team that I think has been 
around to visit just about everybody else. Reference was made by 
the Senator from Alaska to Mr. Irving behind you. The chairman's 
reference to the Department of Justice and antitrust and surprise 
at the joint effort there leads me to believe that Ann Bingaman 
may not have been with the team when they came to visit him. I 
am not absolutely certain. In any event, I understand that the ad- 
ministration, at least with respect to the executive branch of the 
Federal Government, is very much in sync and that there are no 
unresolved differences at this particular point. 

A statement was made yesterday — in a briefing that had to be 
rescheduled from an earlier time because of weather constraints, a 
statement was made that the administration basically supports the 
bill as introduced by Chairman Rollings and many members of this 
committee, up to about 85 percent or so. A similar statement was 
made — and again I am not holding you to the percentages, but a 
similar statement was made with respect to the Brooks-Dingell bill 
that is emerging over on the House side. 

I was not certain then precisely which 15 percent you disagreed 
with, and I know there is always an attempt at comity and other 
appropriate means of carrying on the public discourse as we just 
talk about some of these bills, but I wonder if you would highlight 
precisely what elements of this bill the administration does not 
agree with and what elements of the Brooks-Dingell bill the admin- 
istration does not agree with, so that those of who are trying to 



43 

work through the complexity can focus on the major items in dis- 
agreement and not spend all of us our time complimenting each 
other on the things, that there may be agreement. 

Secretary Brown. We, first. Senator Robb, let me say that I was 
not the senior administration official that put a percentage of 
support 

Senator Robb. And I am not holding you to the percentage. I am 
just asking you if you would identify the precise areas where the 
administration differs with the bill offered by the chairman and 
make the same comment with respect to the Brooks-Dingell bill. 

Secretary Brown. Well, I have attempted to do that. Senator 
Robb, about 1822 today. 

Senator Robb. I acknowledge that, but I wanted to be 

Secretary Brown. Surely. If I could just say, as a matter of prin- 
ciple laying out the basic parameters that the administration has 
put forth, and there were five of them that I articulated, we think 
that 1822 is in accord with all of those, with the exception of title 
VII. 

Senator Robb. Title VII. 

Secretary Brown. And I understand from the testimony today 
that there are a number of members of the committee who would 
support the addition of title VII. So, we are very comfortable with 
1822. We have made what I consider to be, some others might not 
consider to be, modest suggestions or proposals. The major one that 
we made was title VII, because we think that really speaks to the 
future. The others had to do with the sequencing point that I men- 
tioned. Although we agree there should be unbundling before long 
distance, there are some other sequencing measures that we do not 
think are necessary. We made the VIII(c) point. 

Let me see, what were some of the other? Those would be the 
major issues, the three or four that I mentioned in my testimony. 
I would prefer not, because I have been focusing on 1822 in prepa- 
ration for this testimony, to get into an analysis of the Brooks-Din- 
gell bill at this point. I would be glad to spend time doing that with 
you and even preparing a written response to that question, but my 
focus has been on 1822, the subject of this hearing today. 

Senator Robb. Well, Mr. Secretary, I can understand why you 
might choose, even if you had completed the preparation at this 
time, not to fully critique that bill in this forum. [Laughter.] 

But I will say that it would be useful to some of us who are at- 
tempting to identify those areas where substantial policy dif- 
ferences exist to have such a critique, and if you would prefer that 
that not be made public at this time I would honor that request. 

With that, Mr. Chairman, I will yield any time remaining. 

The Chairman. Well let me just comment on the matter about 
antitrust, because I did discuss with Ann Bingaman this particular 
bill before it was introduced, and I made it known to her that — 
and she well knows I recommended her, she is a breath of fresh 
air. I am the appropriations chairman for Antitrust Division at the 
Justice Department, and I can tell you categorically we are way be- 
hind the curve in this particular field and she has got more to say 
grace over than start in here where the FCC has its responsibility. 

And on that basis, trying to eliminate the lawyering, trying to 
eliminate the delays, trying to simplify the procedure, we really do 



44 

not need more of a role for DOJ, other than consultation. Where 
there is an egregious situation of monopolization, then they do con- 
sult and we put that in there, but otherwise we did not want to 
get into the Justice and get into the Judiciary Committees and 
bogged down. 

Now they talk about the complexity. We have learned from hard 
experience we can pass a manufacturing bill and they have got 
amendments. We can pass an information bill, and they have got 
amendments. We have tried to simplify it or a limited approach, 
and that is why it is comprehensive where we can all get together, 
where there is a majority of support on both sides of the aisle and 
in both Houses of Congress, to get a policy set in communications. 
But my comment on antitrust is about the lawyers themselves and 
not the Department. I think it is in the best hands it has been in 
in lord knows when. 

Senator Hutchison. 

Senator Hutchison. Thank you, Mr. Chairman. 

Mr. Secretary, I come from the private sector, as you do, and I 
guess I would just ask a more global question, and that is I have 
seen industries play by the rules as they know them and then Con- 
gress comes in and changes the rules and they have private invest- 
ments and capital investments that are made that they are stuck 
with. Do you have concerns that by deregulating immediately, as 
I understand you think is probably the best way to do, that we are 
creating an unlevel playing field for those who played by the rules 
before, rather than phasing in? 

Secretary Brown. I do not think so. Senator. We think we have 
struck a delicate balance and it is the one that you appropriately 
address. How do we ensure that investors are willing to continue 
to invest large sums of money? How do we give them a sense of 
confidence that the rules are not going to be changed in the future? 

I think one of the things that encourages me is that there has 
been such a dramatic increase in investment even before we come 
up with the new parameters. That is why I am so encouraged by 
the leadership of Senator Hollings and this committee to move S. 
1822 forward. 

I think once we get it in place in its present form or near its 
present form, as we would suggest, we would give that sense of 
confidence. We would increase the comfort level and encourage in- 
vestment. 

Admittedly, we are now in a period of transition. Some of the 
transition is related to a new piece of legislation, but some of it is 
related to exploding technology, some real changes in the market- 
place that I think are probably more profound than these legisla- 
tive changes. 

We have companies who would not have thought about engaging 
in another kind of business just 5 years ago now saying they just 
cannot wait for the opportunity to engage in it. I happen to believe 
that that is constructive competition which will be in the best in- 
terest of both the investors and consumers. 

Senator Hutchison. I will just say that if you could instill in the 
businesses of this country the feeling that Congress would not 
change the rules every other year it would be the best boost to the 
economy that you could give. 



45 

But seriously, you feel then — and I do think you are absolutely 
right, that the exploding technologies have made a situation that 
is probably more different here than the deregulation of other in- 
dustries such as aviation. 

But I am concerned, I guess, about the capital investments that 
are made with the franchising and in cable TV and in local tele- 
phone service, and I just want to make sure that we move very 
carefully so that those capital expenditures can be recouped and 
that we do not in some way create an imbalance in the system or 
an unlevel playing field that causes one industry to be blind-sided. 

And I do think that the committee and the bill have pulled and 
tugged and made every effort to keep that from happening, but I 
just do not know that we have been able to do it totally. And if you 
have any concerns or if after looking at this you see those, I would 
like to hear from you because I want to make sure that we do ev- 
erything to keep that level playing field. 

Secretary Brown. Thank you. Senator. I just might add that I 
share your concerns. One of the things we have tried to emphasize 
in our approach is encouraging investment, giving investors a sense 
of security about the future. I think that S. 1822 moves clearly in 
that direction, and that is why we are supportive of its basic prin- 
ciples. 

Senator Hutchison. Thank you. Thank you, Mr. Chairman. 

The Chairman. Thank you. Senator Dorgan. 

Senator Dorgan. Mr. Chairman, thank you very much. I will be 
brief but I appreciate the administration's testimony today, and ap- 
preciate the leadership of this committee, and have been pleased 
to cosponsor the piece of legislation that has been under discussion. 

I do want to ask some follow up questions about the things that 
were asked by Senator Stevens and Senator Exon. I come from a 
very small town of a rural State of 640,000 people. I grew up in 
a town of 300 people, graduated in a high school class of 9, in the 
top 5. [Laughter.] 

And the fact is when you talk about competition we really do not 
understand much about competition with respect to people rushing 
to try to put competing wires into our homes for electrical service 
or people rushing to provide competing cable systems into 
Hettinger County, ND. And so I want to be sure, as some of my 
colleagues do and I think as Senator Hollings does, that universal 
access means what it says. 

Some will say, well, sure, there will be access, the question is at 
what price. If market forces are now driving the investment that 
you say is being made, $50 to $75 billion. If market forces are driv- 
ing that investment I guarantee you that those market forces are 
driving that investment toward areas that are much more lucrative 
than my home county. That is just a fact of life. 

So, how will market forces provide the assurance that we will 
have the kind of universal access that Senator Hollings, and I, and 
Senator Stevens, and Senator Exon, and so many others want? 

Secretary Brown. Senator Dorgan, as you know I have been in 
your great State with you and traveled much of it, so I appreciate 
your concerns as I do those of Senator Stevens and Senator Exon 
which they expressed earlier. 



46 

I believe part of the answer is new technology. One of the things 
that is happening is you have new technology that, for example, 
will provide 175 channels delivered by satellite to an 18-inch disk 
any place. That changes the equation. I believe that PCS and wire- 
less and other satellite technologies change the equation as well. 

It might well be in a few years they will be competing with local 
telephone companies for the delivery of local services, and I would 
think that that would help consumers by reducing prices. 

We want competition to come to the most rural areas of America 
as well, and we think we are on the track with the suggestions we 
have made and with S. 1822 to getting there. We readily acknowl- 
edge that most of that build-out is not going to be initially in rural 
areas with present technology, but new technology provides new 
opportunities, and we think that is a good thing. We think we 
ought to encourage it. We do not think rural American should be 
bypassed, and we think S. 1822 helps to make sure that that will 
not happen. 

Senator Dorgan. I think all of us would prefer competition. We 
think competition is a market force that provides a leveler on 
prices and so I am not suggesting I would not enjoy it. We would 
welcome competition of almost any form at any time. 

And I have had this discussion with your capable assistance, 
Larry Irving, and others, and I might say that he also gives me a 
great deal of confidence that we know what we are doing in this 
area except that I just want to be sure. If technology does not leap- 
frog to the extent where you are able to provide competition out 
there in a home in the Carolinas or the Dakotas, where there are 
not people rushing to lay wire, will we guarantee access? Will we 
guarantee access at a reasonable price? 

Secretary Brown. Absolutely, and that is the importance, Sen- 
ator, of the universal service provisions. Those provisions are really 
meant to say if the market fails we have other provisions to ensure 
that kind of access. That is why we have made universal service 
a primary goal, for the exact reason that you articulate. 

Senator Dorgan. I might just say that while there is probably 
not direct correlation, there is at least some with respect to deregu- 
lation of airlines. The fact is, if you are living in a major metropoli- 
tan area you can fly twice as far at one-half the cost versus living 
in North Dakota because of the way the industry itself has formed 
itself. 

It has formed a system in which it says, we are going to serve 
hubs and spokes, et cetera, and here is the price. We do have ac- 
cess, no question about that, it is just twice as expensive as the 
folks in areas where the major investment has followed the lucra- 
tive markets. 

And my concern is as you blend or meld the desire to help steer 
private sector investments in a manner that provides opportunity 
for the private sector, that we understand that market forces often 
run in opposite directions of the need for universal access in areas 
of the country where market forces do not provide competition. 

I just think that I cannot stress that enough, because we will 
have a county in Alaska or a county in North Dakota with 2,000 
people in that county. Communications and transportation — there 
are certain things that are universal in need that are just as im- 



47 

portant to the people who Hve in that county as they are to the peo- 
ple in downtown Manhattan, no less important at all. 

So, as we move in this direction I think we need understand the 
countervailing forces. Market forces will not provide the protection 
that I think we need. Only Government can provide that protection 
by making certain that the kind of investments necessary in rural 
areas are made to give the same access to those folks as the folks 
in the urban areas will have. 

Secretary Brown. I might add, Senator, we are all a product of 
our childhood, and I grew up in an inner city area. And I think we 
have to be equally concerned about what happens in low-income, 
inner city areas where we do not get a situation where access to 
information is just related to income, not only geography but in- 
come as well. And that is one of the reasons why, again, we are 
pressing so hard for strong universal service provisions. 

Senator DORGAN. Well, I indicated some weeks ago this is almost 
a case of laying track after the train has passed the station because 
we are literally deciding what the rules are well into the game. 

I am reading and my colleagues are reading every day of mergers 
and buy-outs and take-overs, and the industry making significant 
investments because they have a certain direction they want to 
move in. And I welcome all of that, I might say, except that I want 
to make sure that the end result is something that we believe is 
in the public interest of all Americans, not just a few. 

So, I look forward very much to working with the Commerce De- 
partment and a lot of able people there, and working with the 
chairman. 

Mr. Chairman, thank you very much. 

The Chairman. Thank you. Senator Gorton. 

Senator Gorton. Mr. Secretary, both you and the development 
of your ideas on this subject, and each member of this committee 
has had the benefit constantly of first-rate communications from 
the large telecommunications providers, the regional Bell operating 
companies, you know, the three large long-distance companies, 
cable television companies, and the like in a most eloquent and 
persuasive fashion. 

But as we work toward this profound reformation, working from 
the theory of monopoly in the 1934 act to the theory of competition, 
which is a part of this act, how do we assure ourselves first at this 
level that we hear the views of the small entrepreneurs, the people 
who want to get into this business? 

And how do we assure ourselves that they continue to be able to 
get into the business in an effective fashion and not have one of 
them come up with a dramatic and dynamic new method of com- 
munication which it is able to provide in one or two markets to 
begin with, only to be faced with the fact that one of the huge com- 
panies instantly provides the same kind of service in the same kind 
of community in a way which simply drives them out of business? 

Clearly it seems to me that we are going to be able to create a 
situation in which competition does exist between and among the 
big operators. How do we assure that the small operator, who has 
a genuinely good idea or a genuinely efficient way of providing 
service, is constantly going to be able to get into and benefit from 
the market? 



48 

Secretary Brown. Senator, we tried to be particularly sensitive 
to that concern. The way we set up our advisory committee — as you 
might know Vice President Gore and I have been meeting for sev- 
eral months with a full-range, broad spectrum of people, both of 
small and medium size and large businesses, with consumer 
groups, with those affected by telecommunications technology, try- 
ing to get all those views in the mix as we helped formulate the 
administration's position. 

Clearly it is our view that the direction of S. 1822 must have 
done just about the same thing, because it is sensitive to those is- 
sues. I think our focus on competition and promoting competition, 
our experience over the last two decades with dynamic entre- 
preneurs entering a field that nobody ever thought that they could 
be successful in, but over time they were successful and they were 
successful in a way that benefited consumers both in terms of qual- 
ity of service and cost, ought to make us even more sensitive to 
providing that same kind of access and opportunity in the future. 

I think the way to do it is to be vigilant, to have it as a priority, 
to understand how important it is to the economic future of our Na- 
tion. 

Senator Gk)RTON. Thank you. That is something I think which 
bothers all of us. We want to do the best job we possibly can on 
that, and as we go through this bill it is important that you keep 
that in mind and help us keep it in mind it seems to me. 

Secretary Brown. I think. Senator, if there is one industry where 
there has been great success it is the telecommunications industry 
with start-up companies that started the back of somebody's garage 
a decade ago and now are major enterprises. So, I think there is 
that kind of entrepreneurial dynamism in this field probably be- 
yond most other sectors of the economy. 

Senator Gorton. Now I have a question on a quite different sub- 
ject. Senator McCain brought it up, on the opposite side of the coin, 
asking the justified question as to why preferential rates for State 
and local governments should not be extended to the governments 
of Indian tribes and nations. 

My question, I guess, is more basic. And that is why, on God's 
green Earth, should local and State governments and other public 
entities, which I assume includes everything including huge enti- 
ties like the Bonneville Power Administration or TVA, be g^-anted 
preferential rates over those being granted to the private sector, to 
small businesses and the like in telecommunications services? 

State and local governments regulate and tax all of these other 
customers of telecommunications services. Should we provide them 
with a preferential rate which is just an additional hidden tax on 
the operations of the private sector? 

Secretary Brown. Our judgment on that. Senator, was that that 
really moved in the direction of our universal service and access 
priority, that that was one of the ways 

Senator Gorton. They are not poverty stricken in most cases. 

Secretary Brown. But they also in many cases that reach a 
broad spectrum of the public that might not be reached otherwise. 
So, our view was that that was appropriate, and that is a view in 
S. 1822 as well, as you know. 



49 

Senator Gorton. Well, health care institutions, obviously, public 
libraries and the like I think clearly do fall in that. They are places 
where individual citizens get their communications. 

But I must tell you it troubles me, even as a cosponsor of this 
bill, that small businesses in Manhattan should be subsidizing the 
State of New York with respect to communications services, many 
of which are for its own benefit. 

It seems to me that what that does is to impose a hidden tax, 
another hidden or a hidden State or local tax, not in public, not 
voted for by the legislature. 

Thank you, Mr, Chairman. 

The Chairman. Thank you. Senator Lott. 

Senator LoTT. Thank you, Mr. Chairman. Mr. Secretary, wel- 
come to the committee. 

I would like to begin by publicly commending Senator Hollings 
and Danforth and Inouye and Stevens, all of you that have worked 
hard to put together this legislation. I think you have really come 
up with overall a good package, and I think the opportunities and 
the potential in this area are just the most dynamic and most excit- 
ing, probably, of any sector in the American economy today, and I 
do think that it is time that we developed a comprehensive tele- 
communications policy, because this train is moving out very fast, 
and we need to help to facilitate it every way we can, that move- 
ment, so I think we have basically a good document to work with 
here. 

I want to thank you, Mr. Secretary, for your work and others 
that work with you, and your comment here today I thought was 
a very fine one. We have got a lot of agreement on what we need 
to have in this bill, but there are a few areas I think we need to 
work on some more and have some clarification. 

You were asked one question, I believe, earlier by Senator Exon 
perhaps with regard to rural electric associations' involvement, but 
I particularly want to ask you about what is your position with re- 
gard to the inclusion of the utilities in this process? 

Secretary BROWN. We have not formed one yet, Senator. I indi- 
cated I think to Senator Breaux that it is one that is clearly on the 
radar screen now as these utilities understand the value of what 
they have. 

Senator LoTT. And they do have some unique resources to offer 
in this area. 

Secretary Brown. Yes. 

Senator Lott. But it is included in the bill, and I am very 
pleased that it is in there, and I hope that you will take a close 
look at that very quickly 

Secretary Brown. We are reviewing it, Senator Lott. 

Senator LOTT [continuing]. And if you would get back to us on 
that. You are talking about some of those private individuals in 
their garage getting started. One of the leading companies now in 
the long-distance area is LDDS in Mississippi. I think it is fourth 
or fifth in the long-distance service, and really it started, you know, 
from Brookhaven, MS, and now they are very competitive and offer 
a lot of good service. 

So, I think that the long-distance framework established in S. 
1822 overall is good, and will provide for a lot of openness and com- 



50 

petition that is going to be in everybody's best interest, but I want 
to go back to the questioning that you had from Senator Breaux 
in particular, and I know the chairman is concerned about this, but 
your statement on page 9 with regard to the RBOC's is one I agree 
with very strongly. 

I am afraid we — you know, sort of the attitude here is let us let 
everybody compete. Let us let everybody get in, let us do it as 
quickly as we can, keeping in mind we do not want to, you know, 
put various segments in a disadvantageous position based on their 
investments, but sort of as I thought Louisiana would say, let the 
good times roll, let everybody get in here, let us have openness and 
competition, let us go for it, but it seemed like on the RBOC's we 
put up a number of hurdles, more than is necessary and more 
delay than is necessary. 

For instance, let me just ask you specifically on that, have you 
taken a look at exactly how long it would take for the Bell compa- 
nies to meet their criteria that is outlined here? 

Secretary Brown. We have not made an estimate on it, but we 
would ag^ee with your premise, as I indicated in my testimony, 
that we want to remove barriers, remove roadblocks, get competi- 
tion started as quickly as possible. 

Senator LOTT. You are for allowing access to the loop. So am I. 
I think it is an essential component of this whole process, but I do 
not quite understand why everybody else is being told, "OK, go 
ahead, get in and do it but not in this area." 

We are going to have to have this demonstrative competition 
which is — I do not know exactly how to define that, and I want to — 
I am afraid it is maybe in the eye of the beholder, and I think it 
is just a delay of the process, so I hope that you will help us work 
with the committee, if not the Justice Department and Antitrust 
Division, some way we need to I think reduce the hurdles in that 
particular area, and maybe we could work on it and find a solution 
that we could all support. 

Secretary Brown. We are very anxious to work with the chair- 
man and members of the committee on that matter. 

Senator Lott. Thank you, Mr. Chairman. 

The Chairman. Thank you. Senator Mathews. 

Senator Mathews. Thank you, Mr. Chairman. I hope that I am 
not repetitious. I had President Pro Tem duties earlier this morn- 
ing and I was not able to be here for the presentation. My question 
along the line of Senator Lott's, I want to begin by thanking the 
chairman and the ranking member and other members here for 
putting together a bill that I think addresses some of the questions 
that have been on my mind for a period of time. 

I am not sure — and I say this not pointing a finger at anyone, 
but I am not sure that we did not perpetrate a hoax on the Amer- 
ican public a few years ago when we took that big telecommuni- 
cations agency and broke it down into parts and then protected the 
parts. 

I think the general purpose of what we did was to create an at- 
mosphere for competition, create an atmosphere where business 
could work and where we did not have one monopoly that was serv- 
ing this entire country and setting the rates, but if you look at the 
results of what we did, we maintained each of those parts as a sep- 



51 

arate entity and protected its territory, and I think the bill that is 
before us today, and the bill that has been put together, addresses 
that. 

But back to Senator Lott's question. If we are going to continue 
to protect those parts, if we are going to say to the Baby Bells, you 
cannot do anything except what you are doing until there is a de- 
gree of competition that is going to be officially stamped by some- 
one else over here, and that someone else or that other entity does 
not ever bring that stamp of approval in there, you know it looks 
like we are in a catch -22 situation, and I guess, Mr. Secretary, the 
question I would ask you is. How do you see this competition devel- 
oping? How soon — when are we going to see this work? 

Secretary Brown. I see it developing right away, Senator. I think 
the purposes of S. 1822 are to see it developed right away. Our 
hope is in the future that we have open competition, that any deliv- 
erer of information services can deliver it anywhere. We are not 
there yet. We have got to get there in an intelligent, thoughtful 
way that protects the interest of consumers. 

I think the modified final judgment took a giant step forward in 
that regard, as you have indicated. I think 1822 takes the next 
giant step forward in creating the kind of competitive environment 
and atmosphere that is good as far as the delivery of quality serv- 
ices and doing them at a fair price, so I believe, Senator, that we 
are moving in the right direction. 

I have indicated some suggestions from the administration's per- 
spective that I think removes some of the additional barriers that 
still remain that make it easier to encourage competition at the 
earliest possible time. 

Senator Mathews. As I understand the general position that we 
are in today, the competition is developing pretty well in the busi- 
ness areas and the larger metropolitan areas that we have talked 
about a moment ago, but in the rural parts of my State, for in- 
stance, there is not that rush to get in there to serve residential 
customers. 

Now, we know that stockholders are not going to permit us to 
really get in and spend money unproductively. Will your agency be 
looking at this, as well as some of the others, if it is more economi- 
cal? 

Secretary Brown. We will. Senator. That is one of the roles that 
NTIA is playing, not only how we ensure services to schools and 
hospitals and libraries, but to rural areas, to remote areas as well. 
It is an important role. 

As I have indicated in my earlier testimony this morning, we 
think technology can have a very positive impact, too, that there 
are new modes for delivering information services that I think are 
going to make those services accessible, certainly more accessible 
to rural and more isolated parts of our country. 

We want to do everything we can to encourage that. We do not 
want competition to pass those areas by, and we think new tech- 
nology will present that opportunity. 

Senator Mathews. One final question. As I understand it now, 
we have, let us say, the cable TV wires going to most homes today. 
We have the telephone wires going to most homes. We have the 



52 

electric wires going, and we are in an era now where we do not 
need any of these. We can do it by satelHte. 

Do you see, and will your agency or your Department be looking 
carefully at ways in which to make this technology available gen- 
erally rather than restricting it to the entities that may now serve 
a particular 

Secretary Brown. We are certainly going to attempt to do that, 
Senator. Obviously, the marketplace is going to have to play the 
primary role in that regard, but one of the things that NTIA is 
doing is, as I indicated before, trying to determine ways that we 
can help push demand, which will then encourage investment in 
areas where investment might not be a high priority now. 

Senator Mathews. Well, I think the demand is there, and I 
think the market would play if we remove the barriers. 

Thank you, Mr. Chairman. 

The Chairman. Thank you very, veiy much. Secretary Brown, for 
your appearance here today. We will include your statement in its 
entirety in the record and note also that Mr. Larry Irving was with 
you from NTIA, and we will be listening to you as we move along. 

Secretary Brown. Thank you, Senator. I look forward to working 
with you. 

The Chairman. Yes. You have been a wonderful help here this 
morning. 

Now, Mr. Reed Hundt, then, the Chairman of our FCC. 

Mr. Chairman, we welcome you to the committee. We will in- 
clude your statement in its entirety in the record, and you can de- 
liver it or summarize as you wish, and I want to thank you for fi- 
nally carrying out the intent of the cable communications bill. 

That is about 1 year and 3 months late. I had thousands of let- 
ters for having supported that bill in my campaign for reelection 
in 1992 go out that I was raising rates, and those letters were ac- 
curate until yesterday. 

I welcome you to the committee. We will be delighted to hear 
from you at this time, sir. 

STATEMENT OF HON. REED E. HUNDT, CHAIRMAN, FEDERAL 
COMMUNICATIONS COMMISSION 

Mr. Hundt. Thank you very much, Mr. Chairman. It is a great 
pleasure to be here for a number of reasons. As you know, this is 
my first appearance since confirmation. Second, it is a very great 
pleasure to comment on this excellent bill that you and many of 
your colleagues, Mr. Chairman, have introduced, and third, this bill 
is about the right kind of problem. 

My father, who was lawyer, told me as I embarked upon this ca- 
reer, that I would find tnat there were two kinds of problems. 
There were the bad problems that were getting worse, and there 
were the good things that could be made better, and this bill is 
about the good things that can be made better. 

As a number of members of this distinguished committee have 
pointed out, we have very robust economic growth in the tele- 
communications sector. By the turn of the century, reverses will ex- 
ceed $1 trillion for the total sector, but we also have opportunities 
here that your bill will help industry and Americans take advan- 
tage of. 



53 

If I may, I would like to focus in my brief oral remarks on the 
universal service issue which is dealt with so forthrightly in your 
bill. I have a couple of charts which I would like to put up, and 
I hope all the Senators have copies of these if they want to refer 
to copies in front of them, as opposed to looking across the room 
at the chart. 

If I could ask you to show the first chart, this is a chart of suc- 
cess. This is the success that we have had as a country with uni- 
versal service. The chart shows residential telephone penetration 
from 1930 to 1993, and it shows, of course, a very steady curve up 
from the 1940's through to approximately 1970, and that kind of 
growth is a result in part of Government policies and in part a re- 
sult of the economics of networks, which in short form are this. 

As networks add participants, the economic value of the network 
grows for all participants, not just the person added, because when 
the No. 1 person on the network finds that the next person has 
joined, he has someone else to call, and when a third person joins, 
then there are two other people to call, and so forth and so on. 

In short, the capability of the network to provide value to all of 
the people connected to the network grows, and so there is eco- 
nomic value for all as each is added, but it is part of the economics 
of networks that when you reach a certain state, in this case as 
shown by the chart in approximately the 90-percent zone, it be- 
comes difficult for competitive forces alone to drive the growth of 
the network. 

This is sometimes called the "private optimal point," and the goal 
that our Government has rightly embraced for a number of years, 
decades, is to move the growth of the network to a socially optimal 
point. 

Now, what I would like to next show you is some of the unfortu- 
nate aspects of our current universal service penetration. This 
chart shows that while we have had approximately 94 or 95 per- 
cent penetration as a national matter for quite a long time, our 
universal service has been quite uneven across the country. 

The chart shows in blue the States with the lowest penetration, 
86 to 89.9 percent as of November 1993. The green is the second 
lowest, the yellow the second highest, the red or orange the high- 
est, and what we are talking about here, I suppose, is the age-old 
question of whether the glass is 80 percent full or 20 percent 
empty. But, the fact is that if you are one of those in a State that 
is green or blue, that State's economy is not being helped by the 
presence of the network to the same degree that the network is 
aiding the growth of the economy in these other States, and we can 
do something about this. 

Your bill, Mr. Chairman, would help the FCC very explicitly 
tackle this problem in conjunction with the States. Of course, the 
phenomenon of some States having a poorer level of universal serv- 
ice than others is attributable to other demographic factors, and if 
I could ask you to look at the third chart, it will reveal these statis- 
tics as well. 

Universal service here is shown by race and ethnicity. The green 
line is Hispanic households, the blue line is black households or Af- 
rican American households, and the red line is white households. 



54 

The timeframe, 1984 to 1993, shows a general growth upward, 
modest, which correlates to the general stability of universal serv- 
ice that I showed you on the first chart, but what the chart also 
shows us is that in these 10 years we have not made measurable 
progress in closing the gap in percentage of households with tele- 
phones that exists between white households and the others shown 
on this chart. 

Now, this, of course, is attributable to still other demographic 
factors, the principal one of which I will illustrate for you on the 
last chart that I have to show you today. This is a chart that shows 
universal service, residential telephone penetration, by income, and 
not surprisingly what it shows is that for those people in the zero 
to $20,000 a year class in income, and these are household gross 
income numbers, they have the lowest penetration, significantly 
low — 86.8 percent. But, this is not in your bill in any way a matter 
of indifference, and cannot be a matter of indifference for our coun- 
try. 

One of the main reasons why households have low income is pre- 
cisely their inability to participate in the economy at the same level 
and with the same access that other households can participate. 
Now, one reason might be the lack of education. Another reason 
might be the lack of job opportunity in a particular geography, but 
a very significant reason, in our information economy, is the inabil- 
ity to participate in our networks. 

There was recently a test done among homeless unemployed peo- 
ple in Portland, where they were given access to the network by 
way of a free telephone call that they could make from a pay tele- 
phone if they entered a code, and with this code they could also 
trigger a phone mail system so that they could receive phone calls. 
And what did they do in this test? They used it to seek employ- 
ment, and as I recall the messages they got back were job offers, 
and more than 60 percent of the people in this test actually found 
employment through participation in the network. 

A number of States and local areas have employed this kind of 
experiment and have demonstrated that significant fuller participa- 
tion in the economy can be obtained by a complete universal serv- 
ice, or close to complete universal service. 

Now, we see that in your bill there is an embracing of the con- 
cept of competition, and that, of course, is as it should be. But com- 
petition, ironically, is a threat to universal service and a threat 
that your bill would help cure. It is a threat and it is also an effec- 
tive solution to the problem for two reasons. 

First, competition, in fact, is coming to the local exchange even 
now. In the long-distance market, which is substantially more com- 
petitive and has been for a long time, there are about 400 different 
providers of long-distance service, 400 in addition to the very large 
ones that everyone knows — AT&T, MCI, and Sprint. In the local 
exchange market the competition is just beginning, but there are 
already approximately 30 competitive access providers, or CAP's, 
that compete against the Bell operating companies. The best 
known are Metropolitan Fiber Systems and Teleport. But examples 
are found in the newspapers, still in the back pages, but are found 
in the newspaper every day. 



55 

In New York City, the competitive access providers have already 
connected fiber to over 600 buildings, and of course, they are going 
where NYNEX obtains the greatest part of its revenues. There are 
plans for competitive access providers to compete against NYNEX 
in locations that generate 24 percent of NYNEX's switched access 
revenues. 

California is another example of a State where competition is 
coming to the local exchange. Pac Bell's revenues work like this: 30 
percent of their revenues come from .05 percent of their territory. 
And so the target markets, so to speak, for the competitive access 
providers are extremely well known and they can come in with 
very efficient configurations of systems of very modem technology 
and go for the cream in the market. And they can offer, because 
of technology and also because of their ability to underprice, com- 
petition which is certainly potentially able to take significant mar- 
ket share measured by dollars, if not by subscribers, away from the 
Bell operating companies. 

Now, the only problem with this that I want to emphasize right 
now is that these competitive access providers in the main do not 
contribute to our universal service mechanism. They do not contrib- 
ute to the funds that are necessary to deal with the universal serv- 
ice problems illustrated on these maps and charts that I have 
shown you. But your bill would cure that because it would reach 
to all the telecommunications providers. It would not so distort the 
market efficiencies as to allow them to come in without carrying 
any of the social burden. So, that is something that I would espe- 
cially like to highlight about your bill, and obviously, I do so in a 
very congratulatory manner. 

The second aspect of the deficiency of the competitive model that 
I would like to identify is the market failure that will inevitably 
exist with respect to certain parts of our society as a whole. And 
I specifically refer to the same groups referenced by the President 
of the United States in his State of the Union message this year 
and I am talking about children in the classrooms and adults going 
to libraries. 

There are about 100,000 schools in the country and about 10,000 
libraries in the country and these are just about the only places in 
the country where it is almost impossible to participate in any full- 
fledged way in our networks. Only about 22 percent of all schools 
even have a modem which would permit the kind of computer elec- 
tronic messaging that Senator Stevens talked about with respect to 
the schools in Alaska. 

That is a very laudable case but, unfortunately, a very rare case. 
And it is imperative, I believe, as a social matter and ultimately 
as an economic matter that we find a way to make sure that kids 
in the classroom are connected to our networks and that adults can 
go to the library and get connected to the network. Because after 
all, we also have significant adult literacy and significant adult 
training problems in this country that can be very significantly 
ameliorated by this provision. 

Of course, your bill, Mr. Chairman, does address this very prob- 
lem and gives the FCC the tools that would in turn permit the FCC 
to mandate, through tariffing and other techniques, the construc- 
tion of our networks to all the kids in the classrooms and to all the 



56 

libraries in the country. I think that this is a small feature in 
terms of words in the bill and may very well be the most important 
single isolated feature of the bill. Because for too long our kids in 
the classroom have been disconnected from the networks and we 
should put an end to that. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Hundt follows:] 

Prepared Statement of Reed E. Hundt 

It gives me great pleasure to appear before you today to testify on S. 1822. This 
is my first appearance before the Committee since my confirmation. I am very grati- 
fied that the President nominated me, this Committee unanimously recommended 
my confirmation, and the Senate confirmed me as chair of the Federal Communica- 
tions Commission ("Commission" or "FCC"). I am privileged to serve in this position 
during these very momentous times in our ongoing communications revolution. 

I am particularly pleased to have an opportunity to appear before this Committee 
at the outset of its Hearings on S. 1822. If enacted, this bill would implement the 
first comprehensive revision of the Communications Act since its passage 60 years 
ago. The scope of this bill and the potential benefits that it offers to all Americans 
are a tribute to your progressive leadership, the bipartisan support of Chairman 
Inouye, Senator Danforth, and the other co-sponsors, and the enormous amount of 
work that you and your staff have done in developing this legislation. 

S. 1822 embodies a vision of a new era of innovation and growth for what may 
be the most important sector of our economy in the next century. This bill seeks 
to introduce competition in telecommunications markets currently dominated by a 
single service provider and to increase competition in markets already served by 
more than one firm. At the same time, the bill reafTirms our national commitment 
to universal service in order to ensure that all Americans can participate in the in- 
formation economy. The means to these ends chosen by you, Mr. Chairman, and the 
other authors of this bill is a commitment to a carefully monitored and regulated 
transition from currently non-competitive markets to competitive markets. This cru- 
cial transition will protect consumers from unreasonable prices as competitive mar- 
kets develop. S. 1822 seeks to create a Hexible and adaptive regulatory model that 
is likely to promote substantial investment and lead to economic growth and job cre- 
ation. I commend you, Mr. Chairman, and the other authors of this legislation for 
your comprehensive approach to the difficult policy guest ions that this bill address- 
es. 

I am also very encouraged, Mr. Chairman, that President Clinton and Vice Presi- 
dent Gore have endorsed the same goals of enacting telecommunications reform leg- 
islation in order to promote private investment in the nation's telecommunications 
infrastructure while ensuring access for all. In his State of the Union address, the 
President called on Congress to pass such legislation this year. President Clinton 
stressed that revitalizing the national telecommunications infrastructure will in- 
crease productivity, help us to educate our children, improve the provision of heath 
care services, and create jobs. The President also joined with the Vice President in 
calling on the country to meet the goal of connecting every classroom, hospital, and 
library to the national information infrastructure by the year 2000. 

Mr. Chairman, I believe that the President and Vice President share with you and 
the other authors of this legislation a common vision of the potential benefits that 
our national information infrastructure offers and a common commitment to making 
those benefits a reality for all Americans. I applaud that vision and commitment 
and I am excited by the challenge that lies before us. 

S. 1822 recognizes that the current phase of the telecommunications revolution 
represents a transition to a new telecommunications world in which the average 
consumer will be able to choose among competing suppliers of local, long distance, 
video and wireless telephone services. In managing that transition, we in govern- 
ment at the federal and state levels should seek to promote competition wherever 
and whenever possible and to enhance access to competitive markets for consumers 
and providers of services and products. At the same time, we must continue to exer- 
cise regulatory supervision over telecommunications markets that are not — or not 
yet — competitive in order to replicate, as nearly as possible, the results that a com- 
petitive market would produce. 

Some have argued that the promotion of competition in all telecommunications 
markets, including the local telephone market, is inconsistent with our historic com- 
mitment to universal service. I disagree. The principal goal of universal service is 



57 

to ensure the availability of telephone service at reasonable rates to all Americans. 
A competitive marketplace is the best way to foster lower prices. Competition cre- 
ates incentives for service providers to reduce both their cost of furnishing service 
as well as the prices charged to consumers. Competition also fosters technological 
innovation and the development of new services. 

At the same time, opening new telecommunications markets to competition, in- 
cluding the local telephone market, and the entry of new service providers into these 
markets will require the Commission to review and revise current universal service 
policies and regulations, including financing mechanisms. Existing universal service 
policies and programs were developed when the local telephone market was consid- 
ered to be a natural monopoly. The emergence of competitive access providers and 
the prospect of even greater competition in the local market from new wireless serv- 
ices and cable television operators are part of the growing evidence that undermines 
the assumption that local telephony is a natural monopoly. Consequently, new uni- 
versal service policies will be needed to achieve the public interest objectives in a 
manner that does not distort efficient investment or competitive markets. This bill 
recognizes the need for such a comprehensive review and directs the Commission 
to commence it promptly after enactment. 

Of course, telecommunications markets that have been dominated by a single firm 
for many years do not mature into competitive markets overnight simply by the re- 
moval of entry barriers. The transition to effective competition must be managed 
and supervised by the FCC and state regulators who are charged with ensuring that 
the rates that consumers pay for service remain just and reasonable. That is what 
the FCC has been doing for many years in managing the development of competi- 
tion for telephone equipment and interstate long distance services and what we are 
now doing in conjunction with local franchising authorities with respect to the cable 
television market. The changes that have occurred in the telephone manufacturing 
and sales, and long distance markets over the past 30 years provide an instructive 
example of the benefits to American consumers that can result from properly man- 
aging the transition to competition in a telecommunications market. 

When I was growing up, the telephone was a black, rotary dial instrument that 
was owned by the telephone company and was considered part of the telephone net- 
work. Beginning with the Hush-a-phone case in the 1950's and the Carterfone case 
in the 1960's, regulation of the customer premises equipment ("CPE") market was 
gradually relaxed until the FCC eventually deregulated tnis business and unleashed 
the forces of competition. 

Today, the benefits of competition in the CPE market are tangible. Consumers 
can buy telephones of all shapes, sizes and colors with a bewildering array of fea- 
tures and functions. They can buy telephones with built-in answering machines, 
telephones with memory, telephones with speed dialing, and cordless telephones. 

Since deregulation, prices lor this equipment have fallen, and as prices declined, 
sales increased. Sales of cordless telephones, for example, increased from approxi- 
mately 4 million units in 1985 to 9 million units in 1992. Competition in telephone 
equipment has given businesses the ability to purchase their own private branch ex- 
changes, or PBXs, which enable an office, in effect, to operate its own internal tele- 
phone network and to link remote locations in a single system. Competition has also 
fed to the widespread availability of facsimile terminals. The purchase of fax ma- 
chines soared from 137,000 in 1986 to 3.5 million in 1992, while the installed base 
of this equipment grew from 300,000 terminals in 1986 to 10.7 million in 1992. 

The long distance market has also benefited from competition. Initially, the new 
entrants in this business were hampered by AT&T's control over the local telephone 
networks that its competitors needed to reach consumers. AT&T's practices in the 
long distance (and equipment) markets caused the Department of Justice to file an 
antitrust suit against AT&T in 1974. That litigation culminated in 1982 in a con- 
sent decree, known as the Modification of Final Judgment ("MFJ"), that led to the 
break-up of the old Bell system in 1984. 

The divestiture of AT&T was the seminal event in the development of a trulv 
competitive long distance business. Since 1984, Judge Greene has done an able job 
in enforcing the MFJ to ensure that providers of long distance service compete on 
a level playing field. 

During the past 10 years, the Commission has played an important role in assist- 
ing the efforts of the court to increase competition in long distance. The FCC, for 
example, developed and implemented a system of non-discriminatory access charges 
that permits competing long distance companies to use the local telephone system 
to originate and terminate their long distance calls. This system requires the Re- 
gional Bell Operating Companies ("HBOCs") and other local exchange carriers to 
provide access to the local telephone network on a non-discriminatory basis to all 
long distance companies. 



58 

The Commission also oversaw implementation of the technological changes to the 
RBOCs' local networks that enable consumers to select their carrier for "1+" inter- 
state long distance service instead of being forced to use the incumbent monopoly 
carrier. Although the MFJ required the RBOCs to offer this "equal access" service, 
the Commission extended a similar requirement to non-Bell companies located in 
markets that competing long distance providers wished to serve. 

Today, there are approximately 400 interexchange carriers, both facilities-based 
and resellers. Since 1986, the number of carriers serving 45 or more states has 
grown from 2 to 9. The total long distance market has grown from $38.8 billion in 
1984 at the time of divestiture to $59.4 billion in 1992. 

The introduction of long distance competition has been accompanied by substan- 
tial reductions in toll rates. For example, the price of a 10 minute daytime call from 
Chicago to Atlanta, expressed in 1993 dollars, was $6.28 in 1984; today that same 
call costs only $2.30. 

Consumers responded immediately to this decline in rates. In 1985, AT&T carried 
approximately 133 billion of the total 167 billion minutes of interstate usage. Over 
the next ei^t years, AT&T's market share steadily declined from over 80 percent 
to 60 percent, but its tradic volume grew by about 60 percent to 212 billion minutes 
and the volumes of its competitors increased more than four-fold to 138 billion min- 
utes. 

The remarkable increases in long distance calling since divestiture reflect two of 
the principal benefits that competition in the telecommunications industry has pro- 
duced over the past decade: declining prices and increased usage of our tele- 
communications network. The more competitive telecommunications environment 
has also led to an expanding array of new long distance calling plans and services 
for consumers. 

Economic growth in the telecommunications industry over the past decade has 
contributed significantly to improving consumer welfare in this country and has 
played an increasingly larger role in the overall domestic economy. In 1982, the tele- 
communications equipment and services sector generated approximately $94.6 bil- 
lion ($143 billion in 1993 dollars) . By 1993, that figure had grown to $171.9 billion. 
The growth in the communications and information sector as a whole over this pe- 
riod also has been impressive. In 1982, the total sector generated approximately 
$317 billion; $478 billion in 1993 dollars. By 1993, the total sector amount had 
grown to about $718 billion. 

The history of the CPE and long distance markets over the past decade shows 
that competitive markets serve the interests of consumers by creating strong eco- 
nomic incentives for product and service providers to reduce their costs, lower their 
prices, promote technological innovation and respond quickly to changing consumer 
demana. The FCC played a critical role in the evolution of both these markets by 
removing regulatory barriers to entry by new competitors and taking steps to ensure 
that consumers would have access to competing service providers. The emergence 
of competition in these markets was accompanied by a gradual relaxation of the 
Commission's regulatory controls. In the case of the long distance market, certain 
of AT&Ts services, most notably basic Message Toll Service used by residential sub- 
scribers, remain subject to greater regulatory supervision than other services, such 
as 800 service, because of concerns that competitive forces alone may not be ade- 
quate to protect consumers. We intend to follow the same policy of promoting com- 
petition while maintaining close regulatory supervision over markets that are not 
yet competitive in carrying out our responsibilities under the 1992 Cable Act. 

The goals of efficient competition and economic growth should continue to guide 
the development of our policies for regulating telecommunications common carriers 
and cable television systems. The reform legislation that you have proposed, Mr. 
Chairman, will furnish the Commission with additional regulatory tools to further 
those objectives. As this bill recognizes, however, those goals should not and need 
not be promoted at the expense of important social objectives. 

Various segments of the telecommunications industry — telephone companies, long 
distance companies, competitive access providers — support reform of our existing 
telecommunications laws oecause they believe that it will advance their commercial 
interests. The role of the FCC, in my view, is to support legislative initiatives that 
also will serve broader, public interest objectives. This bill represents such an initia- 
tive because it charges the FCC with promulgating rules that will enhance the ac- 
cessibility of classrooms, health-care facilities and libraries to advanced tele- 
communications services. 

Promoting the widespread accessibility of such services to students, health-care 
professionals and their patients, and the general public is sound public policy. Ac- 
complishment of that objective offers the promise of enduring benefits tnat would 
result from a better-educated workforce, nationwide access to advanced health-care 



59 

services, and public accessibility to a wide array of information services, including 
government services. 

I also think it important that this goal is established at a time when much of the 
design of the network needed to provide these services is still in the planning stage. 
I believe that the cost of achieving this objective will be significantly reduced iiit 
is included as part of an overall plan for delivering advanced telecommunications 
services to the public. 

In sum, Mr. Chairman, this bill addresses three essential aspects of the reform 
of our telecommunications laws. The bill returns to the Congress principal respon- 
sibility for formulating national telecommunications pxjlicy. It furnishes the Com- 
mission with the legislative mandate necessary to open markets that have been 
dominated by a single provider and to foster competition in those markets, while 
ensuring that consumers are protected during the transition. And it makes explicit 
this nation's commitment to ensuring that all Americans share in the benefits that 
the emerging information economy will offer. 

S. 1822 
/. Local Exchange Competition 

Entry 
I applaud S. 1822's objective of promoting competitive entry into the market for 
local exchange and exchange access services. The local network is almost the only 
telephone market today that continues to be dominated bv a single provider. The 
advent of new, wireless technologies, such as Personal Communications Services 
("PCS"), the growing presence of competitive access providers, and the expanded ca- 

f labilities of cable systems create the potential for an effectively competitive market 
or local telephone service. 

S. 1822 would eliminate governmental barriers to entry into the local market that 
would undermine the development of competition for local services. The removal of 
these barriers should foster tne continued development and deployment of advanced, 
reliable technologies. New entrants can be expected to both utilize and compete with 
the service offerings of the local telephone companies. The introduction orcomf)eti- 
tion for local services on a broad scale also will create strong incentives for compet- 
ing firms to increase the pace of technological innovation, develop new services, and 
reduce their cost of providing service. All of these efforts will contribute to economic 
growth by stimulating demand for telephone service. 

Safeguards 

S. 1822 correctly recognizes the need for safeguards to ensure that new entrants 
can interconnect their facilities with the existing local networks. Although Section 
201 of the Communications Act of 1934, as amended, currently empowers the Com- 
mission to order common carriers to offer interconnection to other carriers, the bill's 
explicit treatment of reasonable nondiscriminatory access and interconnection issues 
properly highlights their importance in a world of many facilities-based tele- 
communications service providers. Interconnection and interoperability are essential 
to the full realization of the benefits that vigorous compx;tition in the local exchange 
market can produce. 

S. 1822's proposal to require exchange carriers to offer interconnection at any 
point that is "technically and economically feasible" establishes a workable standard 
for the FCC to apply in formulating regulations to govern interconnection arrange- 
ments. Many of the issues identified in S. 1822 related to unbundling, access, and 
interconnection, however, involve considerable technical complexity and implicate 
network reliability and integrity concerns. We would be pleased to work with the 
Committee stafTin refining and clarifying these sections of the bill. 

Regulatory Flexibility 

I am pleased that the bill gives the Commission forbearance authority. The Com- 
mission s exercise of its limited existing forbearance authority under Title II has 
produced substantial benefits. The permissive detariffing policy contributed to the 
development of a competitive long distance market, and more recently to the emer- 
gence of competition for access services, share the view expressed in S. 1822 that 
inter-carrier compensation arrangements and fiexible regulation for nondominant 
and, at the appropriate time, formerly dominant carriers will be critically important 
to fostering local exchange competition. 

New carriers entering the local market to compete with incumbent telephone com- 
panies need the discretion to package and price their service ofTerings so that they 
are attractive to potential customers. By the same token, as competition increases 
the incumbent telephone companies will require pricing fiexibility to respond to 



60 

competitive offerings. This legislation would grant the Commission the discretion 
necessary to manage this transition. 

Preemption 

Another merit of S. 1822 is that it would authorize the FCC to preempt any state 
regulation of entry or state policies that restrict the exercise of interconnection or 
access rights provided by the bill or the FCC's implementing regulations. I think 
it would be advisable to extend preempt ion to inconsistent state rate regulation re- 
quirements. Rate regulation of non-dominant service providers may hamper their 
ability to compete effectively with the incumbent carrier. By the same token, contin- 
ued rate regulation of previously dominant carriers may prevent the local market 
from becoming effectively competitive. 

//. Universal Service 

Enthusiasm for promoting new competitive markets and encouraging new tech- 
nologies and services must not distract our attention from the critical task of ensur- 
ing that all Americans have access to basic telephone service. Currently, approxi- 
mately 94 percent of all American households have telephones. That is an impres- 
sive, but not completely adequate, achievement: almost 6 million households do not 
have active telephone service. Furthermore, a disproportionate percentage of house- 
holds without active telephone service are low-income, particularly African Ameri- 
cans and Hispanics. 

The continued deployment of new telecommunications technologies capable of de- 
livering a wide range of advanced services will require the FCC and the states to 
address on an ongoing, evolving basis whether access to basic dialtone (voice grade) 
service should continue to be the only goal of universal service. I share the authors' 
view that it is imperative to redefine tne term "universal service" periodically over 
time, as technology advances. 

In my view, the FCC and the states must work together to formulate and admin- 
ister a consistent, national universal service policy. S. 1822 assigns to the states the 
"primary responsibility for defining universal service." It may be worthwhile to con- 
sider, in particular, whether this approach is the most effective for establishing a 
national universal service policy ana, more generally, what the respective roles of 
the FCC and the states in tnis process should be. 

In addition to embracing an evolving definition of universal service, it is also quite 
appropriate for the bill to impose the obligation of contributing to universal service 
"on a competitively neutral basis." This principle is fair and consistent with promot- 
ing competition and efficiency. 

As I discussed earlier, I share the view of the authors that telecommunications 
has a vital role to play in the education of our children and the provision of high 
quality health care services. I applaud the provisions of the bill that direct the FCC 
to promulgate rules that will enhance the availability of advanced telecommuni- 
cations services to all public elementary and secondary school classrooms, health 
care institutions, and libraries." 

///. Modification of Final Judgment 

The MFJ prohibits the RBOCs from engaging in certain telecommunications busi- 
nesses, most notably the provision of interLATA interexchange services and the 
manufacturing of telecommunications equipment. Initially, the decree also barred 
the RBOCs from providing information services, but the court elinninated this prohi- 
bition in 1991. 

Since the divestiture of AT&T in 1984, the structure of the interexchange and 
equipment markets has changed substantially. Although AT&T continues to control 
by far the largest share of the interexchange market, there are now hundreds of do- 
mestic interexchange carriers. Further, over the past decade MCI and Sprint have 
become established nationwide competitors. Competition in the telecommunications 
equipment market also increased during this period, as the RBOCs and other ex- 
change carriers substantially increased their purchases of switching and other 
equipment from non-AT&T suppliers. Moreover, the development of eiiective com- 
petition in the local telephone market, as contemplated by S. 1822, would limit the 
incentives and ability of the RBOCs to engage in cross-subsidization. 

In light of the changes over the past 10 years, I agree with the authors of S. 1822 
that the time has come to develop a plan for lifting the remaining MFJ line-of-busi- 
ness restrictions and returning primary responsibility for regulating the practices of 
the RBOCs to the FCC. I also agree with tne authors of this bill that any plan for 
removing these restrictions must provide adequate safeguards to preclude the 
RBOCS Trom using their existing market power in the local exchange to undermine 
competition in the markets they seek to enter. 



61 

RBOC Entry Into Interexchange Services 

I support the objective of allowing the RBOCs, over time and subject to appro- 
priate safeguards, to provide interexchange services. With their capital resources 
and technical expertise, the RBOCs have the capability to increase the competitive- 
ness of this market. Consumers of long distance services would be the principal 
beneficiaries of increased competition in this market. 

The bill establishes different standards for assessing RBOC entry into interLATA 
interexchange services within and outside of the areas that they furnish local ex- 
change services. I agree that the risk of anticompetitive discrimination and cross- 
subsidization by these companies may be greater m their service territories than in 
areas outside of their operating regions. The RBOCs continue to control the local 
exchange bottleneck that long distance companies need to reach their customers. 
Moreover, the RBOCs may use the same trunking and other plant and facilities for 
long distance service that they use for local exchange and access services. Joint use 
of these facilities potentially could increase the risK that an RBOC might attempt 
to cross-subsidize its entry into long distance by assigning costs associated with 
interexchange service to local exchange ratepayers. These concerns are diminished 
significantly in my view if the RBOC provides long distance service outside of its 
region, whether over the facilities of an unaffiliatecT company or over facilities used 
by an affiliated company to offer cable television service or wireless services. 

Mergers between RBOCs and out-of-rcgion cable companies or wireless services 
have the potential to advance competition in the local exchange. Allowing an RBOC 
to use out-of-region facilities owned by an affiliated company for the provision of 
long distance service could promote the use of the same facilities for local service 
as well, providing competition to the local telephone company in that area. More- 
over, although the risk of anticompetitive behavior outside of an RBOCs operating 
territory may be significantly lower, S. 1822 would still require prior approval by 
the FCC before an RBOC would be permitted to offer out-of-region interLATA serv- 
ices. 

I believe that it is appropriate for this legislation to exempt from the general re- 
striction against interexchange services certain services that are clearly 'mcidental" 
to other services that the RHOCs are permitted to orovide. Judge Greene granted 
waivers for several of these types of services over the past 10 years. As a result, 
for example, RBOCs currently are authorized to provide cellular service in various 
areas that cross LATA boundaries. In view of the continuing evolution of technology 
and changes in telecommunications markets, I would suggest that the Committee 
consider whether the FCC should be given authority to identify other "incidental" 
interexchange services that the RBOCs should be permitted to provide. 

RBOC Entry Into Manufacturing 

I also support S. 1822's objective of permitting the RBOCs to engage in the manu- 
facturing and provision of network equipment, and the manufacturing of CPE, sub- 
ject to elTective and appropriate safeguards. RBOC entry into these markets can en- 
hance competition, promote continued technological innovation in CPE and other 
equipment, and foster lower prices. Further, their direct involvement in research 
and development should facilitate the production of equipment that is suited to each 
company's requirements and improve network reliability. Entry of the RBOCs into 
manufacturing, subject to appropriate safeguards, should benefit both consumers in 
the equipment market as well as the U.S. economy generally. From telephones, to 
fax machines, to wireless cellular telephones and pagers, telecommunications equip- 
ment has become a ubiquitous presence in our lives. Consumers throughout the 
United States, residential and business, urban and rural, would gain from the addi- 
tional competition that the RBOCs could provide in these markets. The additional 
economic activity spurred by their entry should benefit the economy as a whole. 

Our experience with long distance telephone service and CPE has shown the tan- 
gible benefits to the economy and consumers that arise with more competitive mar- 
kets. I believe consumers will realize similar benefits in telecommunications equip- 
ment markets with the passage of this legislation. 

As product and geographic markets develop and change, however, it may be nec- 
essary for the FCC to adopt regulatory safeguards that will protect consumers and 
competitors against anticompetitive practices without hampering the ability of the 
RBOCs to compete. Generally, I believe that it would be wise to confer upon the 
Commission appropriate regulatory tools to accomplish the legislative goals of safe- 

fuarding competition and consumers. 1 believe that the Commission can and should 
e able to meet these goals under changing economic circumstances by fiexible im- 
plementation of both structural and especially nonstructural safeguards. 

Because the RBOCs currently are permitted to provide (although not manufac- 
ture) CPE, the Commission has enacted regulations designed to reduce the ability 



62 

of the RBOCa to engage in anticompetitive practices in this market. The Commis- 
sion's Part 68 rules govern the compatibility standards between the network and 
CPE. The "no harm to the network" standard for compatibility has contributed sig- 
nificantly to making the CPE market robustly competitive. In addition, the Commis- 
sion has imposed a series of nonstructural safeguards to protect against discrimina- 
tion and cross-subsidization. Specifically, the Commission has adopted unbundling, 
network disclosure, and nondiscrimination reporting requirements on the RBOCs, as 
well as comprehensive accounting regulations. 

The significant competition already present in current telecommunications equip- 
ment markets provides an additional safeguard to discipline the behavior of the 
RBOCs. As competition among communications equipment suppliers continues to 
evolve into a global market, the potential for the RBOCs to cause anticompetitive 
harm will diminish as well. 

/v. Competition in the Multichannel Video Distribution Market 

Entry 

The market for multichannel video distribution is dominated today by cable tele- 
vision providers and I think everyone agrees that this market should be opened to 
more competition. The existing prohibition that bars telephone companies from pro- 
viding video programming to customers in their telephone service areas should be 
repealed. It is very appropriate, therefore, that S. 1822 would remove this restric- 
tion and allow local telephone companies to compete with cable companies in provid- 
ing one-way and interactive video services. 

Direct, facilities-based competition between cable and telephone companies will 
produce substantial benefits for the American public. Competition in this market 
will spur the deployment of advanced technologies that are capable of delivering the 
full range of services that customers demand. These services include not only enter- 
tainment services, but also the growing number of educational, health, and social 
services that are accessible over broadband technologies. 

In addition, competition in this market can be expected to produce the same posi- 
tive results for consumers that we have seen in other markets for telecommuni- 
cation services that have undergone the transformation from monopoly to competi- 
tion: technological and service innovation, lower prices, and responsiveness to 
consumer tastes. Telephone company entry also will expand the electronic market- 
place of ideas by creating new outlets for video service providers. 

As you know, Mr. Chairman, the FCC already has taken steps to enhance com- 
petition in the multichannel video distribution market. Within a few months, U.S. 
consumers will be able to receive programming from a Direct Broadcast Satellite 
service. This service is capable of delivering scores of channels of video program- 
ming directly to homes and office equipped with 18-inch dishes. 

In 1992, the Commission authorized telephone companies to offer video dial tone 
service within their operating territories through a basic platform that provides non- 
discriminatory access to multiple video programmers. Since the rules were enacted, 
four telephone companies have received authorization from the Commission to con- 
struct and operate video dial tone systems for purposes of testing technology and 
evaluating consumer demand for the services offered. 

Elimination of the existing cross-ownership restriction should stimulate new tele- 
phone company investment in facilities that are capable of delivering video and ad- 
vanced telecommunications services. Consumers should be the beneficiaries of the 
expanded choices that facilities-based competition in this market will foster. 

The Committee may also want to consider authorizing the Commission to adopt 
rules requiring both telephone company video affiliates, as well as cable companies, 
to permit nondiscriminatory access to their systems by unaffiliated video program- 
mers. Establishing such a right of access is likely to enhance the diversity oT pro- 
gram sources available to consumers and foster compjetition among video service 
providers, including the owners of the facilities. 

Safeguards 
Adequate safeguards must be in place to ensure vigorous and effective competition 
between telephone companies and cable companies. In recommending removal of the 
prohibition against telephone company entry into video programming in 1992, the 
FCC cautioned that certain restrictions might be necessary to prevent potential 
anticompetitive practices, including possibly a requirement that a telephone com- 
pany provide video programming to end users through a separate affiliate. S. 1822 
would impose this restriction and I support that approach as an initial requirement. 
I believe it would be useful to give the FCC the authority to modify the scope and 
nature of the separate afTiliate requirements, including, for example, modifying the 



63 

broad prohibition against joint marketing, if a future investigation shows that it no 
longer serves the pubUc interest. 

In general, we should aspire not to impose unnecessary or duplicative regulations 
that increase consumer rates and hinder the development of fully competitive mar- 
kets for telephony and video services. Thus, S. 1822 properly grants the Comnussion 
the regulatory flexibility necessary to permit it to refram from imposing obligations 
that would undermine, rather than foster, the continued development of competitive 
markets for telephone services. I hope that this Committee considers granting fur- 
ther regulatory flexibility to the Commission so that it may refrain from imposing 
on telephone companies that offer video programming requirements that may dimin- 
ish, rather than strengthen, competition in tnis market. 

CONCLUSION 

Mr. Chairman, as your hearings continue, I will commit the very able staff of the 
Commission to the task of commenting on and pursuing the topics raised by the 
members of your Committee and the witnesses. Our experts will be available to con- 
sult with members of the Committee or their staffs. 

I thank you, again, Mr. Chairman, for the opportunity to appear before this Com- 
mittee and testi^ about these important bills. I also look forward to working with 
you and the other members of the Committee as the legislative process moves 
ahead. I would be happy to answer any questions that you may have about my testi- 
mony. 



[Four color charts referred to above may be found in the committee's files.] 

The Chairman. Thank you very much. 

One thing that comes to mind very quickly, because I want to get 
into these hurdles they are talking about which are not hurdles at 
all, it is their hurdle that they propounded, you have given a real 
good breakdown of the universal service. Can you give me a real 
good breakdown of the income of the Bell companies, the seven 
RBOC's. 

My understanding is that they have a cashflow of $5.5 billion. 
And of that $5.5 billion they put out about $1.2 billion in dividends, 
$600 million in taxes, and that leaves them $3.7 billion. And they 
will spend between $2 and $3 — let us say $2.7 billion on the up- 
keep and putting in optic fibers. Some spend less, and in fact there 
is an attraction right now to spend less because that makes them 
a greater profit. But in any event, in round figures they end up 
with $1 billion in their pocket and a $5.5 billion cashflow. And, you 
know, they are running all over the country and all over the world. 

And in my view, and it is just on that particular point, I mean, 
I could list down where they all are investing, but I can see the 
chairman of the board of one meeting with his directors and all of 
the directors say wait a minute, up there in New York they have 
bought so and so, and somebody says no, they got TCI, and another 
one says oh, no, they are in Mexico, what are we doing with our 
money? 

And we find out what they are doing with their money, when we 
look at that Paramount deal, and we find out listed down as a loser 
here in last week's news, and I will read this: The regional tele- 
phone giant entered the Paramount battle by pumping $1.2 billion 
into Viacom to support its bid. The move was quickly ridiculed on 
Wall Street. What made NYNEX look like a chump? In fact, it got 
no voting stock from Viacom in return for its millions, and it could 
only squeeze 5-percent annual dividends from Viacom on the in- 
vestment. That meager return got NYNEX in trouble with regu- 
lators and consumer groups? Reason? NYNEX seeks a much higher 



64 

return for providing telephone service to consumers, so critics 
charge that NYNEX was using phone customers to subsidize an ill- 
advised foray into show business. 

Now, that is one of the big things bothering this particular Sen- 
ator because you are talking about universal service. You cannot 
let the Bell companies go broke like the Resolution Trust Co. and 
the S&L's. I mean, they are public utilities. They are common car- 
l"iers. They provide the universal service. So, they can go to any 
bank and say "Look, I have got $5.5 billion cashflow and $1 billion 
in my pocket and I want — whatever you want, sir." And here, we 
end up where the ratepayers are going to have to bounce back on 
these things that you see going around destroying that universal 
service. 

Now, I have been their boy. I have gotten them manufacturing 
and they have gotten the so-called information services and all the 
things they want, and they had me coached pretty good. And they 
said constantly we do not want long distance, we do not want long 
distance. Now, they are talking about hurdles to get in long dis- 
tance. 

Let me also enter into the record here their hurdle, and I am 
using what Ameritech wrote. The full letter, it is already included 
in the record, dated October 20 to our distinguished ranking mem- 
ber. Senator Danforth, and their test is there is no substantial pos- 
sibility that a reasonable company could use its monopoly power to 
impede competition in the market it seeks to enter. 

Now, that is exactly the test that we included in the bill, with 
the elaboration because the lawyers will say that is very vague, 
and I know how lawyers can use language. I tried an antitrust case 
for one-half gallon of milk and it took 3 years. Now, literally, 30 
years ago if you wanted to give me this case, they want to know 
how soon they can get in, under that particular test you can stretch 
that out for years and years and years on end. 

On the other hand, I note that MCI said they are going to spend 
several billion to get into local markets. If they get into a local 
market of a Bell company, this afternoon that is competition. It is 
serious competition. It is separate competition and that means, yes, 
the local RBOC can get immediately into long distance. So, they 
ought to try to get AT&T and MCI into their regional areas. 

And let me also include the letter from AT&T on what they 
thought the test should be. If we would use that test we would be 
here forever. 

[The information referred to follows:] 

Letter From Robert E. Allen, Chairman of the Board, AT&T 

October 5, 1993. 

Senator DaNIEL K. Inouye, 
U.S. Senate. 
Washington, DC 20510 

Senator John C. Danforth, 
U.S. Senate. 
Washington, DC 20510 

Dear Senators Inouye and Danforth: As promised at your September 8th 
hearing on S. 1086, I am pleased to provide you with legislative language, which 
we believe appropriately defines "effective competition" in local telephone services. 
While we have discussed the language and sought input from several industry par- 



65 

ticipants, the proposal is AT&T's alone. Other parties may wish to comment or sub- 
mit their own language. 

I have asked my Senior Vice President and General Counsel, John Zeglis, and 
Mike Brown of our Washington Office, to work with your stalT in developing lan- 
guage for the bill. I appreciate your interest and personal involvement in these im- 
portant issues. 

Very truly yours, 

R.E. Allen. 



AMENDMENTS 

Interexchange Services (Sections 9 & 10): 
Add a new provision (to section 231 or 232), as follows: 

"(a) Except as provided in these sections, no Bell Telephone Company or affiliate 
of a Bell Telephone Company shall engage in the provision of interexchange tele- 
communications services. 

"(b) No earlier than seven (7) years after the enactment of this section, a Bell 
Telephone Company may petition to the Conunission for authorization to provide 
interexchange telecommunications services. 

"(c) The Conrmiission may grant authorization to a petitioning Bell Telephone 
Company to provide interexchange telecommunications services upon a showing by 
the Bell Telephone Company (i) that there is no substantial possibility that the peti- 
tioning Bell Telephone Company or its affiliates could use monopoly power to im- 
pede competition in the provision of any interexchange telecommunications services 
and (ii) that effective competition in telephone exchange and exchange access serv- 
ices exists in the region in which the Bell Telephone Company provides telephone 
exchange and exchange access services. Effective competition can be found to exist 
only if: 

"(1) all the regulations required by section 229 of this Act have been adopted 
by the Commission and the States and the requirements of subsection 229(c) 
and number portability have been fully implemented by the Bell Telephone 
Company and its affiliates in the exchange areas of the Bell Telephone Com- 
pany; 

"(2) 30 percent or more of the telephone subscribers in the exchange areas 
of the Bell Telephone Company obtain telephone exchange and exchange access 
services exclusively from an alternative provider; and 

"(3) 75 percent or more of the telephone subscribers in the exchange areas 
of the Bell Telephone Company may obtain, from two or more alternative pro- 
viders, telephone exchange ana exchange access services that are like the serv- 
ices of the Bell Telephone Company and comparable in quality, coverage, price 
and capability. 
"(d) The determination by the Commission regarding an application made under 
subsection (c) shall be final unless, within 60 days aHer such determination, any 
person injured by the determination commences a civil action against the Commis- 
sion in the district court of the United States for the District ol Columbia for a de 
novo determination regarding the authorization. The Court shall enter judgment 
granting authorization only to the extent it finds the Bell Telephone Company has 
made the showing required by subsection (c). A judgment entered under tnis para- 
graph shall be stayed until any appeals from the judgment have been exhausted or 
tne time for filing appeals has expired. 
"(e) Definitions— As used in this Section: 

"(1) The term 'alternative provider' means a provider of telephone exchange and 
exchange access services 

"(a) that is not affiliated with the Bell Telephone Company providing such 
services in that area continuously since January 1, 1984, and 
"(b) that provides exchange and exchange access services 

"(i) hat are like those provided by that Bell Telephone Company without 
making use of the switching, transmission or other facilities of that Bell 
Telephone Company, and 

"(ii) that permit the alternative provider's subscribers to place and re- 
ceive calls to and from any of its other subscribers without making use of 
the switching, transmission or other facilities of that Bell Telephone Com- 
pany, and 

"(iii) that provide its subscribers with exchange access to interexchange 
carrier networks without making use of the switching, transmission or 
other facilities of that Bell Telephone Company. 



66 

"An alternative provider may interconnect with facilities of the Bell Telephone Com- 
pany solely for tne purpose of allowing calling between telephone subscribers of the 
alternative provider and those of the Bell Telephone Company. 

"(2) The terms 'exchange access', 'exchange area', 'interexchange carrier*, and 
'interexchange telecommunications services' all have the meaning given those terms 
in the Modification of Final Judgment and judicial decisions interpreting that judg- 
ment." 

DESCRIPTION OF EFFECTIVE COMPETITION AMENDMENT 

(a) No interexchange services would be permitted without passing the test, except 
for the current cellular and video authority in the bill. 

(b) A seven (7) year waiting period is required to permit time for local competition 
to develop. During this time the RBOCs' incentives to open their local networks 
would not be diminished by anticipation that interexchange relief is imminent. This 
time frame will allow for the adoption of state and federal regulations to open local 
networks to competition, the development of a new universal service structure, and 
implementation and network re-engineering by the telephone companies. Seven 
years is a reasonable time for competition to develop from essentially a standing 
start and was, in fact, proposed last year in the House (H.R. 5096). 

(c) Any FCC approval requires passing an effective competition test and the cur- 
rent decree's "inipeding competition" requirement. Both are important. The former 
would have the FCC find that effective competition has replaced monopoly in local 
services. The latter would guarantee the Commission an opportunity to examine 
whether, notwithstanding compliance with the effective competition metrics, other 
factors indicate that the RBOCs remain a threat to the continuation of vigorous 
interexchange competition. 

The effective competition provision requires: 

1. Full implementation by the local Bell Company of the open network and num- 
ber portability provisions in Section 229 of the bill; 

2. 30 percent of subscribers actually relying upon alternatives to the Bell Com- 
pany in its region; and 

3. Two or more competitors offering services like those of the Bell Company to 
75 percent of subscribers in the region. 

(d) De novo court review permits the court and case law to play its proper role. 
An "alternative provider" is defined as a full facilities-basea competitor for the 

Bell Company, using only its own connections to the customer, switcning and local 
transport. Arrangements would be permitted for calling between the systems. If 
competitors continue to be dependent on the local telephone company to offer serv- 
ices to customers, then true competition will not have developed. 

Four other terms ("exchange access", "exchange area", "interexchange carriers" 
and "interexchange telecommunications services") are defined with reference to the 
MFJ as is now done with "LATA," again utilizing existing case law. 

The Chairman. Let me read that letter. It is dated October 5, 
1993, from AT&T, what they thought the test should be — so we 
used a compromise from that test and they are still crying, and the 
reason is, Mr. Chairman, they have got too much money in their 
pockets and they do not know what to do with it. And tne test is 
there. It is their test, and as long as they do not perpetuate a mo- 
nopoly, if they do not destroy competition being employed as a bot- 
tleneck, then fine business. They can get into long distance. But 
they want into long distance right now using their market power. 

That is the difference. Senator from Tennessee. You wonder why 
all the rest of those other folks are not common carriers and do not 
have monopoly power. That is the reason. That is the difference. 
Why for these companies they have got hurdles? It is not hurdles 
at all. It is what they suggested, and it is elaborated on and if you 
can change the elaboration, Mr. Chairman of the FCC, let me 
know. Do you think that elaboration is unfair, distorted, burden- 
some? That would be my question. [Laughter.] 

Mr. HUNDT. I think that 

The Chairman. This is the real issue. We have been listening 
and learning and we will continue to listen and learn. But all of 



67 

a sudden, the ones who wanted a bill, now they do not think they 
want a bill. If they do not get a bill then they are going to continue 
to get cherry- picked. They ought to hope that we pass this bill this 
afternoon because it makes them all common carriers and then 
cannot erode their particular common carrier base or universal 
service base. That is the whole thrust of this bill. 

I wish we could pass it this afternoon because we could finally 
give the RBOC's the protection that they deserve because that is 
what they were formed as monopolies. We guaranteed them a mo- 
nopoly and we guaranteed them a profit. And now we, under the 
technology, can no longer guarantee that monopoly. So, they have 
got to be able to protect it and they deserve it. And in that light, 
they ought to hope the bill would pass this afternoon. 

But you know, when you get them rich like that, they are run- 
ning around with $1 billion in their pocket and do not know which 
country to go to and what movie theater to buy and everything else 
of that kind, I mean, they are in trouble. You ought to see them 
running around. 

Mr. HUNDT. Well, we have a country right here that needs ad- 
vanced services and that is absolutely right with respect to the 
test. 

I would like to make, with your indulgence, a very lawyerly 
point, but, nevertheless, one that I think is very important to 
make, and that is the FCC would be given a very significant re- 
sponsibility, obviously, under your bill, and I would not want my 
comments to be taken by anyone in the audience as a prejudgment 
of how we would exercise that responsibility. 

With that I think extremely important qualification, let me make 
two points. First of all, I think that it should be recognized by ev- 
eryone in the business community that the most important aspect 
of the test that is in S. 1822 or any of the alternative tests that 
might ever be proposed, is, with great respect to the drafters, not 
the actual specific language of the test, but the facts that would 
have to be considered in connection with those tests. And I am 
sure, Mr. Chairman, in the milk antitrust case you spent the bulk 
of your time on the facts and understood that that is what would 
determine the result, as has been the case in every case brought 
under the Sherman Act and Clayton Act for the last 100 years. 

The facts with respect to each Bell operating company and with 
respect to each geographic market may very well differ. The exam- 
ples that I gave earlier were examples about certain geographies 
in the country. Manhattan is a place where competition already is 
thriving. Competition will arrive in some areas a lot sooner tnan 
it arrives in many of the States that have elected the distinguished 
members of this committee. So, that is my first point, that it will 
be very, very important to focus on the facts and to recognize that 
the legal facts will be, comparatively speaking, of lesser impor- 
tance. 

Now, that is not to take away from the significance of the discus- 
sion about the legal test. I would offer two observations about the 
test. First of all, I think it is absolutely right for your bill to con- 
template a separate test for out-of-market or out-of-region service 
than in-region service. I think the theoretical possibility of anti- 



68 

competitive behavior is distinctly less for out-of-region activities, 
and I would commend your bill in that respect in particular. 

And second, with respect to the actual and demonstrable com- 
petition aspect of the in-region test, I would want to listen as you 
go through the process of these hearings and see if there were dis- 
cussion on how exactly the theory of contestable markets would be 
embraced within the scope of the actual and demonstrable competi- 
tion test. I think that that comparatively modern theory has sub- 
stantial validity. It concerns just how much actual competition 
needs to be present if providers are being interconnected promptly 
because of open access. 

And there has been a lot of very valuable work, particularly 
among telecommunications experts, on the applicability of contest- 
able markets. And I would think that that should have some pres- 
ence within the ambit of your test. 

The Chairman. Well, if there is any specificity or generalization 
necessary, or elimination — I mean, there is no particular pride of 
authorship here with all of the lawyers working before Judge 
Greene in all their hearings and everything else like that, and we 
broke it down into how they were approaching it and everything 
else, and listed it here in this bill. 

But in all candor, let us have your suggestions. If there is any 
change, if there is anything burdensome or even, again, still vague 
that you would like specified because it is going to be your work. 
I mean, there are going to be different tests, as you indicate, and 
we all know for different markets at different times, and every- 
thing else of that kind. They asked the previous witness, well, how 
long could it take? If they never got competition in the local market 
they would still have the monopoly power — never. 

On the other hand, the movement is to get into that local mar- 
ket. And if they come in and they are separate, and they have not 
disallowed the unbundling requirement and they have all agreed to 
that, then the question is really a competition test. There is no 
extra hurdle to it that I see, but others may well prevail. 

Let me find out just exactly what it is, and please do give us if 
you can in another month here — if you can break down the income 
and their expenditures from the records at the FCC, the seven 
RBOC's, and whether or not they are investing. In fact, I would 
like to make a record at this particular time, on the one hand, that 
there is only, according to you, you say in dollars or revenues, a 
.8-percent invasion into that local market and universal service as 
of this time. So, we are right in time. 

The local exchange carriers still have 99.2 percent. We list out 
all these names, and you said some 30. And you list 300. That is 
still less than 1-percent penetration in there at this particular 
time. 

On the other hand, there is another study that was just released 
yesterday with respect to their investment once you have got 
CAFs. If we can find that we will enter that into the record. I can- 
not put my hand on it right at this moment, but the CAP's really 
cause them to start making money in that the costs were going 
down. And so with the CAP and less costs they are making greater 
profits. And as a result of that they are investing less, trying to get 
the Consumer Federation of America. 



69 

And I will enter that into the record. Dr. Mark Cooper, CFA's di- 
rector of research. We will later get this individual up to be cross- 
examined. But he says that capital spending as a percentage of 
cashflow by the Bell operating companies has declined from over 80 
percent at the time of divestiture to around 65 percent. 

[The information referred to follows:! 

Consumer Group Estimates $5 Biluon in Baby Bell Overcharges 

Washington, DC, Februaiy 18, 1994 — The Consumer Federation of America 
today released an analysis of the financial condition of the Regional Bell Operating 
Companies (RBOCs), which estimates overcharges for 1992 at $5 billion per year, 
or $5 per month for every residential subscriber in the nation. 

"Cumulatively, since divestiture, the total of excess profits is about $35 billion," 
Dr. Mark Cooper, CFA's Director of Research, and author of the report said, "and 
these funds have not been plowed back into the telephone networit. Capital spend- 
ing as a percentage of cash flow by the BOCs has declined from over 80 percent 
at the time of divestiture to around 65 percent today. Instead, massive resources 
have been diverted out of the industry." 

The report, the seventh in CFA's series of analyses of RBOC finances, is entitled 
"Milking the Monopoly: Excess Earnings and Diversification of the Baby Bells Since 
Divestiture." It points out the following with respect to the use of income and cash 
flow. 

• While capital spending has declined as a percentage of cash flow, dividends 
have not and dividend yields are twice as high as other large corporations. 

• Since 1986 the Baby Bells have paid $35 billion in dividends, invested $13 bil- 
lion to non-telco activities, but put only $1 billion in net new telco investment (above 
depreciation charges) into the public switched network. 

• The $35 billion of non-telco assets amassed by the Baby Bells have performed 
poorly, earning less than a 4 percent return on equity. 

'The report breaks new ground by comparing the earnings and capital structure 
of the Baby Bells to other companies in the information industries," Cooper added. 
Key findings in this area include: 

• The return on eauity enjoyed by the RBOCs significantly exceeds 

not only the other large companies in the economy, but also the companies in the 
information industries with which the RBOCs are seeking to compete. 

• The Baby Bells carry over 80 percent debt in their unregulated subsidiaries, 
without paying a penalty in the cost of borrowing, by leveraging the monopoly rate- 
payer cash flow to underwrite the debt of non-telephone subsidiaries. 

• This ability to leverage ratepayers gives the Baby Bells an immense advantage 
over the other firms in the information age industries, who must carry much more 
equity at risk. 

'These findings have far reaching implications for the ongoing debate about the 
information superhighway," Cooper noted. "They indicate that (1) the Baby Bells do 
not face competition at a key intersection on the information superhighway, the 
local switch, (2) giving them additional incentives to invest could be money for noth- 
ing, and (3) leverage over ratepayer cash flow could give the Baby Bells significant 
market power over the superhighway." 

'The fact that we see a Baby Bell at the center of each of the megafirms emerging 
in the information age has little to do with technology and a great deal to do with 
this current and future cash flow," Cooper added. 

"We are gratified that policymakers have begun to recognize the importance of 
preventing abuse of ratepayers as a way to create a level playing field for competi- 
tors in the information age," Cooper concluded. "We see a growmg commitment to 
a number of key policies such as — 

"reasonable rates based on a cost-based allocation between competitive and mo- 
nopoly services, which could begin to address the problem of excess earnings; 

"structural separations prohibiting leveraging of any RBOC assets, which could 
beginning to address the problem of unequal access to fmancing; and 

"elimination of market power prior to entry by the Baby Bells into other lines of 
business, which could reduce the monopoly control over the local bottleneck." 

The Consumer Federation of America is the nation's largest consumer advocacy 
organization, composed of over 250 state and local groups with some 50 million 
members, whose purpose is to represent consumer interests before the Congress, 
Federal Agencies and the Courts. 



70 

MILKING THE MONOPOLY: EXCESS EARNINGS AND DIVERSIFICATION OF THE BABY BELLS 

SINCE DIVESTITURE — INTRODUCTION 

Over the past decade the Consumer Federation of America (CFA) has charted the 
excess earnings of the Regional Bell Holding Companies (RHCs) and the misuse of 
those funds for investment in activities unrelated to the public switched network. ^ 
At a time when Congress is debating what activities to allow the RHCs into and 
whether it is necessary to stimulate additional investment in the information super- 
highway, an understanding of the financial resources of the Baby Bells and what 
they do with them is crucial. 

This seventh study in our series extends our previous analysis of the excessive 
earnings of the Baby Bells in several directions. 

• It updates our estimates of the amount of excesses earned by the Baby Bells. 

• It explores m greater detail the diversion of resources out of the industry. 

• It examines the capital structures used to gain leverage in non-telephone busi- 
nesses. 

• It adds a new dimension to the analysis by looking at the capital structure and 
economic performance of the information industry segments with which the Baby 
Bells claim to be competing. 

WHERE DOES ALL THE MONEY COME FROM 

Turning History on its head 

Traditional rate of return regulation allowed utilities an opportunity to earn a sta- 
ble return on investment. The target rate of return was set to be commensurate 
with the risk of the investment, which was small in a monopoly environment. There 
was no guarantee that the allowed rate of return would be achieved, however, and 
the utility was supposed to work hard to hit its target. 

In the decades before divestiture, telecommunications investment by AT&T 
earned a stable rate of return that was between one and two percentage points 
below that of the manufacturing sector as a whole (as Figure II-I shows).2 The fact 
that AT&T's return was substantially below the average for the manufacturing sec- 
tor reflects the fact that AT&T faced less risk in its franchise monopoly businesses 
than other businesses did. 

At the same time, the allowed rate of return and the achieved rate of return were 
well above the 10-year treasury bond rate. This is a relatively risk free investment 
of a term similar to that for utility stocks. Historically, the risk premium was a few 
percentage points. In particular, in the decade or so prior to divestiture, AT&T 
earned only two points above the T-bond rate. 



iCFA first noted rising prices as a source of concern less than a year after the break-up in 
Gene Kimmelman and Mark Cooper, Divestiture One Year Later, December 19, 1984. Major 
analysis of excess earnings were conducted in Dr. Mark N. Cooper, Local Rate Increases in the 
Post Divestiture Era: Excessive Returns to Telephone Company Capital, September 1986; "Com- 
ments of the Consumer Federation of America," In the Matter of Policy and Rules Concerning 
Rates for Dominant Carriers, before the Federal Communications Commission, CC Docket No. 
87-313, October 19, 1987; "Joint Comments of the International Communications Association 
and the Consumer Federation of America, In the Matter of Access Tariff Filing Schedule Before 
the Federal Communications Commission, CC Docket No. 88-326, June 22, 1988; "Joint Com- 
ments of the International Communications Association and the Consumer Federation of Amer- 
ica, In the Matter of Comprehensive Study of the Domestic Telecommunications Infi-astructure, 
Before the National Telecommunications and Information Administration, Docket No. 91296- 
9296, April 9, 1990; and most recently in Dr. Mark N. Cooper, Divestiture Plus Eight: The 
Record of Bell Company Abuse Since the Break-Up of AT&T, December 1991. 

2The fact that this return on equity was more than adequate to do the job of attracting capital 
and providing for a technologically dynamic and economically sound industry has been amply 
demonstrated in and "Consumer Federation of America * ♦ * 1987, and "Joint Comments 
* ♦ ♦". 1990. 



71 



FIGITRE n-1 



RETURN ON EQUITY 
BELL SYSTEM V. ALL MANUFACTURING 



o 




57 62 


67 72 7: 


r 84 88 92 


^- MAMUF. 


-^RBOC REG 


^-10 YEAR T-BOMD 



ECOeiEC REPORT OF M! PRESIDE>rr, STfiTlSTICo OF 
CXIMMON CnRRJERS, fl. KfiHN, UHUTY RDSULfTnWJ REVISTED 

Since divestiture this pattern has been turned on its head by the Regional Bell 
Operating Companies (RBOCs). They have earned over seven points above the T- 
bond rate and two points more than all manufacturing companies. The swing in 
comparison to firms m the manufacturing sector, who face much greater competition 
than local telephone companies, is striking. In 1992, the RBOCs earned 8 percent- 
age points above the ten year T-bond rate, while all manufacturing earned only 3 
percent above. 

In 1992, the RBOCs had almost $60 billion of equity. Thus, a net increase of over 
five percentage px)ints in return on equity translates into an increase in income for 
the RBOCs of approximately $3 billion per year. This is the core of the excessive 
returns earned by the Baby Bells. 

Recognizing Risk and the Cost of Capital 

To a significant degree, the problem of excess earnings has it origin in the fact 
that the rate of return set soon aflcr divestiture was set at a high level because 
the RBOCs were new entities and there was some question about now they would 
fare in the new environment. Experience has shown that local exchange service is 
low risk and highly profitable. The early concerns were unfounded. To the extent 
that higher rates of return were allowed in those early days in response to these 
uncertainties that have been eliminated, rates of return should be lowered today. 

Table II-I shows several measures of the cost of capital from 1984 compared to 
inid-1993, or 1992, where only annual numbers are relevant. Looking at rates on 
borrowing, like 10 year treasury bonds or the discount rate, we observe a 6 percent- 
age point decline in the cost of capital. Earnings by the Business Week 1,000 and 
in the manufacturing sector are down by 2 to 3 percentage points. 

Table 11-1— Changes in Capital Costs Since 1984 





1984 


1983 


Change 


Loan rates: 
3-month T-bill 


118 

12.4 

8.8 

12.0 

12.5 
13.2 


3.0 
54 
3.0 
6.0 

10.3 
10.4 


—88 


10-year T-bond 


-70 


Discount rate 


-58 


Prime rate 


-6 


Return on equity: 
All manufacturing 


—22 


Bus. Week 1.000 


-28 



72 



Table 11-1 — Changes in Capital Costs Since 198 
Continued 





1984 


1983 


Change 


RBOCs 


13.7 


14.5 


+0.8 



Sources: Economic Report of the President 1993; Monthly Economic Indicators, various 
Issues: Business Week I.OOO, various Special Issues; Federal Communications Commis- 
sion, Statistics at Communications Common Carriers, various issues 

The rate of return earned by the RBOCs has siniply not come down. This has re- 
sulted from a vigorous campaign conducted by the RBOCs. They have resisted com- 
ing in for rate changes in states where the Commission does not have the authority 
to force rate reductions. They have pushed for deregulation of profits in states 
where the Commission has such authority. 

In short, the Baby Bells exploited the uncertainties of divestiture to increase rates 
in 1984/85 and have fought a guerilla war to prevent them from coming down since. 
In fact, in many states the full benefit of the reduction of the corporate tax rate 
in 1986 was never passed through to consumers.3 

Competition and the Rate of Return 

The dramatic increase in rates of return sustained over the decade since divesti- 
ture flies in the face of the RBOCs' argument that competition is eroding their mar- 
ket power. Their argument rests on the assertion that competition makes it impos- 
sible for regulators to continue to practice traditional, rate of return regulation be- 
cause competition threatens revenue streams and profitability. 

The flaw in the argument is that there is no competition for the vast majority 
of services provided by the local exchange companies. Looking back over the period 
since divestiture (see Figure 11-2), we find that local service revenues have been 
growing as fast in recent years, when competition was supposed to be growing, as 
immediately after divestiture. 

FIGURE in-2 



LOCAL REVENUES 



CO 

cc 
< 

—1 



o 

(/> 

z 
Q 



CQ 




82 84 



88 91 



At a more micro-level, it is clear that the vast majority of LEC revenues come 
from services that are not currently threatened by competition. These include the 
monopoly core business — i.e. local exchange service and associated access charges. 
Here we can also include some of the socalled competitive services in which the 
technology deployed, access to customers, and/or the monopoly local exchange serv- 
ice give the company a large advantage. Included in this category are Custom Call- 
ing features, residential long distance, residential customer premise work, Yellow 
Pages, high capacity private line, and Centrex. 



73 



The claim that earning power is being eroded by competition is also undermined 
by a comparison between RBOC earnings and those of tneir purported competitors, 
as Table II-2 shows. We have included the lines of business identified by most ana- 
lysts as being part of the information age. These are the areas m which the RBOCs 
claim to be facmg competition for one or more of their services. 

Table il-2 — Return on Equity and Capital Structure tor Local Exchange Companies, 
Their Potential Competitors and Other Utilities 



All industry 

Bell BOC avg 

Bell non-BOC avg 

Other utilities: 

Electric utilities 

Gas Utilities 

Other LECs: 

GTE 

SNET Telecom 

Rochester Tel 

Cincinnati Bell 

Telecommunication 

Equipment 

Companies 

Other nonutilities: 

Broadcast & Cable . 

Movies 

Publishing 

Advertising 

Computer software . 

Computer hardware 

Peripherals 

Consumer elctrncs .. 

Home shopping 



Forbes 198»-92 



11.5 

14.5 

4.3 

11.4 
108 

15.3 

12.2 
13.0 
10.4 
11.5 



Loss 

6.5 
11.0 
17.4 
19.2 

6.4 
117 
126 
110 



Business Uttk 



1992 



10.4 

14.8 

26 

110 
10.2 

14.4 

12.9 

11.7 

5.9 



15.4 
14.4 

5.4 

13.6 

6.9 

19.9 
20.9 



-103 



1991 



92 

130 

49 

100 
11 

14.0 

108 

12.9 

6.7 



3.3 

11.5 

-1.1 

11.6 

4.7 

140 
18.4 



-1.1 



1990 



12.5 

146 

85 

97 
61 

12.9 

119 
11.5 
15.5 



15.9 
13.7 

5.1 

12.9 

7.1 

160 
20.1 



no 



Debt as percent 
ot capital 



33 
29 
85 

38 
40 

44 
37 
39 
30 
33 



69 
34 
18 
27 

8 
10 
19 

8 
20 



Sources Forbes Annual Repod on American Industry. January 3. 1994; Business Week 1.000. various special issues; Federal 
Communications Commission. Statistics of Communications Common Carriers, various issues 

The return on equity earned by these potential competitors over the past five 
years, as calculated by Forbes, and the past three years as published in Business 
Week is generally lower than that of the RBOCs. Broadcast, cable, movies, enter- 
tainment, publishing and computer hardware and peripherals have much lower 
rates of return. These are the major areas which are projected to be the core of the 
information age. Only software and advertising show a higher rate of return. 

The table also includes other points of comparison to appreciate just how strong 
RBOC earnings have been. They have earned much higher rates of return than 
other utilities, which face even greater competition than they do. They have also 
earned more than other telephone companies. 

Conclusion 

Based on this review of profit performance before and afler divestiture and com- 
parisons to other companies in the economy, as well as the potential competitors of 
the telephone companies, we conclude that there have been excessive profits earned 
since divestiture. The return on equity has experienced a swing of approximately 
five points compared to the historical pattern. The result is excessive profits of ap- 
proximately $3 billion per year. 

In the context of a regulated utility service such as the RBOCs, these excess earn- 
ings place a heavy burden on rate payers. These are after tax rates of profit and 
rates are set to include taxes collected from ratepayers. The result is that the reve- 
nue requirement associated with these excess earnings is $4.6 billion higher than 
it should have been. 

WHERE DOES ALL THE MONEY GO 

Take the Money and Run 

One of the major claims made by the RBOCs to support their campaign for higher 
earnings, alternative regulation and entry into other Dusinesses is the assertion that 



74 



incentives would encourage the companies to seek greater efficiencies in the delivery 
of services and more rapid deployment of infrastructure. However, it should be rec- 
ognized that rather than pursue efficiencies throu^ investment, companies might 
choose to take their money and run, diverting it to unregulated activities. With the 
availability of immediate returns, they could simply increase current profits and 
cash flow, rather than reinvest in the network. 

An analysis of the use of cash flow by the RBOCs gives strong indication that this 
is what they have done. As Figure III-I shows, capital expenditures as a percent 
of cash flow have declined. 

FIGURE m-1 

RBOC CASH ?LOW USED FOR 
CAPITAL EXPENDITURES AhP DIVIDENDS 



5: 

o 



< 

(J 



z 

O 

^— 

O 
a. 




84 



85 



86 



87 



88 



89 



90 



91 



92 



AMER 

PACTEL 



BA 
SWB 



— BS 
^>^USW 



-^NYNEX 



The numbers are quite large. The BOCs have enjoyed an increase in cash flow 
of more than $7 billion, yet they have increased capital expenditure by a little more 
than $1 billion. In short, there has been a massive throw off of cash. In fact, since 
1986 capital expenditure has decline three quarters of a billion dollars, while cash 
flow has increased by over $1 billion. In the last several years, capital expenditure 
has been approximately equal to depreciation, indicating no new net investment in 
the network. 

We also observe this problem at a more micro level. Appendix A presents the re- 
sults of an econometric study of the impact of increases in income and alternative 
forms of regulation on the deployment of specific technologies. We fmd that there 
is virtually no relationship between either alternative regulation or higher levels of 
income and the deployment of digital switches, SS7 or fiber optic cable. This is con- 
sistent with the observation that the companies tend to take the money and run. 

Excessive Dividend Payout 

The increase in cash How which has not been put back into the network has been 
thrown off in the form of dividends and acquisition of unregulated assets as Figure 
III-l shows. In contrast to capital expenditure, which declined as a percentage of 
cash fiow, the RHCs increased dividend payout as rapidly as cash flow increased. 

Dividend payments have increased by over $2.5 billion per year since divestiture. 
In essence, the RHCs have maintained their dividends at about one-third of cash 
flow. The dividends paid by the RHCs are quite high compared to other businesses 
as Table III-l shows, at over twice the average of Business Week 1,000. 

Table III-l — Dividend Yield: RBOCs Compared to Other Corporations 





1984 


1985 


1986 


1987 


1988 


1989 


1990 


1991 


1992 


Ameritech 

Bell Atlantic 


7.3 
7.7 


5.5 

5,5 


5.5 

5.1 


58 
5.4 


5.7 
5.5 


5.2 

4.8 


5.3 
49 


59 
60 


5.0 
4.8 



75 
Table III-1 — Dividend Yield: RBOCs Compared to Other Corporations — Continued 





1984 


1985 


1986 


1987 


1988 


1989 


1990 


1991 


1992 


Bell South 




5.4 
5.5 
6.4 
6.6 
5.9 
5.8 
2.8 


5.0 
5.0 


5.5 

5.6 
5.6 
6.1 
6.1 
5.7 
2.8 


5.8 
5.8 
5.1 
5.6 
5.8 
5.6 
3.0 


4.6 
5.4 
4.1 
4.7 
5.2 
4.9 
2.9 


52 
60 
4.8 
5.1 
5.2 
5.2 
2.8 


6.1 
6.3 
5.4 
4.9 
6.2 
5.8 
24 


50 


NYNEX 

PACTEL 

SW Bell 


5.1 
4.7 
39 


US West 


5 1 


RBOC avg 

Business Week 


4.8 
2.1 



Sources Business Week, Scoreboards Issues 



Diversion of Cash Into Non-Telephone Businesses 

The second primary use of these excess earnings and cash flow has been to funnel 
them out of the industry and into the acquisition of over $35 billion in unregulated 
assets — everything from real estate to foreign exchange deals. Table III-2 snows a 
conservative estimate of the throw off of resources from the RBOCs. It is conserv- 
ative because it includes only the current (year-end 1992) non-BOC assets held by 
the RHCs. Many of the RHCs have thrown cash off into very bad non-telco invest- 
ments, which have already been written off. Including those losses would push the 
total of assets acquired close to $40 billion. 

Table III-2 — Non-Teico Assets of Regional Bell Holding Companies as of December 31, 1992 

(Dollars in millions] 





Assets 




Assets 


US West 


$7495 
6087 
5951 
5021 


NYNEX 

Ameritech 

PACTEL 


$3794 


Bell Atlantic 


3499 


Southwestern Bell 


3334 


Southern Bell 









Sources Federal Communications Commission, Statistics of Communications Common Carriers 1992/93 

The result of this pattern of investment is to dramatically alter the nature of the 
RHCs at the expense of rate payers as Table III-3 shows. Since their creation in 
1984 the RHCs have been among the most profitable corporations in the country. 
They have earned about $74 billion. The RHC profitability is made up of about $72 
billion in income from telephone operations and $2 billion in income from non-tele- 
phone operations. They have used this income as follows: $49 billion in dividends 
to stocknolders, $16 billion in investment in non-telco activities, $13 billion in net 
investment in telephone infrastructure. Thus for every $1 of net new investment In 
telephone operations since divestiture, there have been $1.25 of investment In non- 
telco operations and $3 of dividends. 

Table III-3 — Regional Bell Holding Company Economic Activity 





[Uses of income in 


billions of dollars] 








1984-92 


1987-92 




1984-92 


1987-92 


Total income 


74 
49 


51 
35 


Non-tel Investment 


16 

13 


13 


Dividends 


Net telco investment 


1 



[In billions of dollars] 





Asset makeup 




labor makeup 




1984 


1987 


1992 


1984 


1987 


1992 


Total 

Telco 

Non-telco 


137 
127 

7 


162 

145 

17 


182 

146 

36 


Total 

Telco 

Non-telco 


568 
NA 

NA 


560 

468 

92 


515 
410 
105 









Source Federal Communications Commisskin, Statistics of Communications Common Carriers various issues; company annual reports 

Following the money in 1987-1992 gives a much sharper image of where the Baby 
Bells are going. They have used their income in recent years as follows: $35 billion 
in dividends, $13 billion to non-telco activities, $1 billion in net telco investment. 
Thus, for every $1 of net new investment in the network, there have been $13 in- 



76 

vested in non-telco activities and $35 of dividends. Of course, the companies spent 
a lot more than $1 billion on the public switched network in the last five years, but 
that was all funded with depreciation, yielding virtually no net increase in invest- 
ment. 

As a result of this shift of investment, there has been a radical change in assets. 
Today, over one-fiflh of the total assets of the Holding companies (some $35 billion) 
are in non-telco assets. 

Jobs follow the money. Between 1984 and 1988, employment in the holding com- 
panies was constant. Since then, there has been an 8 percent decline in employ- 
ment. However, jobs in telco operations have declined by 12 percent, while non-telco, 
largely non-union, jobs have increase by 12 percent. Today, one out of every five jobs 
in the holding companies is in non-telco activities, which parallels the asset configu- 
ration. 

The Failure of Non-Telephone Company Assets 

The $35 billion of assets in non-telco holdings have performed badly. These assets 
have a net income of just $2 billion over the period. Figure 1II-2 shows that the un- 
regulated assets of the RBOCs have performed poorly. The average return on equity 
is less than 4 percent. The poor performance of these assets makes it clear that the 
regulated, monopoly companies are the source of financial resources for his expan- 
sion. These non.p>erforming assets have been sustained by the income producing mo- 
nopoly assets. 

FIGITRE ni-2 



RETURN ON EQUITY 



20 



IG 



12 



BOC VS. MOM-BOC 



UBSDIARES 



UJ 
Q- 



BEU 80CS 



^.r-" 



BEUL N<»-eoc 




84 



85 



86 



87 



88 



89 



90 



91 



92 



There have been some monumental failures, such as U.S. West's forays into the 
real estate business in the mid-1980s and NYNEX's foray into equipment services. 
Bell Atlantic, the leader of current efforts to merge the cable and telephone indus- 
tries, has accumulated $6 billion of unregulated assets, which have a net loss of 
about $700 million. 



LEVERAGING THE MONOPOLY BASE TO FUND UNREGULATED BUSINESS 

There is yet another way in which the rate payers and potential competitors of 
the local exchange companies have been abused by RBOC financial manipulations. 

Excess BOC Equity To Underwrite Risky Non-BOC Ventures 

The financial reports of the companies identify approximately $16 billion in cash 
which has been directly invested in the non-BOC assets. That is, the difference be- 
tween dividends paid by the BOCs to the RHCs and the dividends paid by the RHCs 
to their stockholders is just over $15 billion. The total invested in non-BOC lines 
of business is just over $15 billion. 



77 



However, the monopoly ratepayer has been responsible for far more of the total, 
non-BOC assets acouired by tne RHCs. The RHCs have manipulated the capital 
structure of their suosidiaries and used the BOCs to leverage debt of the non-BOCs. 
The result is that cash flow from monopoly ratepayers underwrites borrowing in the 
non-BOC entities. 

The capital structure of the subsidiaries is entirely within the control of the 
RBOC management. Over the years since divestiture the capital structure has been 
changed by corporate policies to reduce debt (relative to equity) in the BOCs (even 
though interest rates nave been plummeting since 1984) and increase reliance on 
more expensive equity through retained earnings. In 1984, the RBOCs carried $48 
billion in equity and $36 billion in long term aebt, plus $26 in deferred long term 
obligations (taxes). Today they carry $59 billion in equity and $36 billion in debt, 
plus $32 billion in deferred obligations. Thus, equity has been increased in relation 
to long term debt. 

Figure IV-1 shows the ratio of equity to long term debt in the BOC and Non-BOC 
subsidiaries (excluding deferred taxes). The difference is startling. The BOCs carry 
twice as much equity in the BOC subsidiaries as in the Non-BOC subsidiaries. 

FIGURE rv-l 



100 



< 

o 

en 



DEBT/EOUITY RATIOS OF TELEPHONC AND 
NON-TELEPHONE SUBSIDIARIES 



o 

_i 

u. 
o 






60 



40 



20 





TELCO NON-TH.CO 

One would normally expect the opposite to be the case. Markets would insist on 
higher equity capital at risk in the more risky unregulated ventures, which, as we 
have seen, have performed poorly. Risky ventures that are highly leveraged, as the 
RBOCs unregulated activities are, would require very high interest rates. 

The Subsidy From Ratepayers to Stockholders as a Competitive Advantage 

The core monopoly businesses have been used to carry much higher levels of eq- 
uity, raising the cost of capital for ratepayers, but also providing a stable return to 
investors, while the risky unregulated businesses have been fmanced with debt, 
which is guaranteed by monopoly cash flow. The RBOCs get away with low equity 
ratios, without raising the cost of their debt dramatically, by having the ratepayer 
absorb the risk in the form of excess equity retained in the operating companies. 
This creates high revenue requirements, large amounts of free cash for the hold- 
ing company and stable earnings tied to the monopoly business. The dividends paid 
by the operating companies to the parent holding company have exceeded the total 
dividends paid by the company to snarcholders. The excess dividends transferred to 
the parent exceed the total debt of the unregulated subsidiaries. 

Thus, not only does the parent guarantee the debt, but it has the cash flow from 
the operating telephone companies to back up the guarantee. The result is favorable 
overall fmancials and plenty of free cash to ensure that debt payments for the un- 
regulated company will be covered by dividends from the operating company to the 
parent. 



78 

The result of this subsidy is to give the RBOCs a tremendous financial advantage 
as they move into competitive businesses. Table II-2 above shows the capital struc- 
ture of the BOCs, the Non-BOC subsidiaries, and other types of companies in the 
economy. As with the financial analysis, we include both utilities, which are the 
standard of comparison for the monopoly telephone business, and the information 
industries, which are the standard for the non-BOC subsidiaries. 

The BOC subsidiaries have a very low level of debt compared to utilities — ^just 29 
percent. The non-BOC subsidiaries have a very high level of debt — compared to non- 
utilities — approximately 85 percent. Only the Cable/Broadcasting category comes 
close, and tnat is still much lower than the non-Boc subsidiaries of the RHCs. 

In spite of this extreme leveraging, non-BOC debt still pays market rates (about 
7 to 7.5 percent). There is no doubt that the monopoly ratepayer and potential com- 
petitors are being abused in this process. Ratepayers are used unfairly to guarantee 
the debt of the non-BOC business. The competitors could not get away with the cap- 
ital structure, which results in lower costs for the BOCs, because they do not have 
a monopoly ratepayer base to leverage. 

CONCLUSION 

The Magnitude of the Excesses 

The manipulation of capital structure to support the expansion into non-telephone 
businesses places additional burdens on ratepayers (see Table V-1). Public utility 
commissions have traditionally insisted on debt equity ratios in the vicinity of 50/ 
50 for the monopoly lines of business. 

TABLE V-i 

Estimating the total revenue effect of excessive earnings and leveraging monopoly 
ratepayers 

Current equity 59X.145=8.55X1. 55=13.25 

Reasonable equity 48X. 10=4.80X1. 55=7.44 

Debt increase 11X.07=.77X0=.77 

Total 8.21 

Net reduction 5.04. 

If the BOCs had been held to such a ratio, they would have been able to lower 
the revenue requirement significantly, since low cost debt would replace higher cost 
equity in the capital mix. The equity part of the capital structure would be reduced 
by approximately $11 billion. This would lower the net income, compared to 1992, 
by approximately $1.6 billion at the 15 percent return on equity enjoyed by the 
BOCs in 1992. 

As Table V-1 shows, the overall excessive earnings enjoyed by the RHCs as a re- 
sult of excessive profitability and excessive equity in the capital structure is approxi- 
mately $4 billion, at a reasonable rate of return on eauitv of 10 percent and a 50/ 
50 capital structure. The revenue requirement would te lowered oy approximately 
$5 biUion, when tax effects and increased interest expense are taken into account. 
The cost is almost $5 per month for every residential subscriber. 

The Implications of the Analysis 

In the current policy context, however, as Congress moves to amend the Commu- 
nications Act of 1934 and speed the construction of the information superhighway, 
telephone company excess profitability takes on greater significance than the burden 
it places on household and ousiness budgets and the misallocation of resources. 

• The excessive profitability and cash fiow currently enjoyed by the RBOCs is 
just one further indication that they do not face competition at one of the key inter- 
sections of the superhighway, the local exchange switch. 

• The abuse of cash flow suggests that giving BOCs additional incentives to in- 
vest could be money for nothing. 

• Further, monopoly control over the local switch could combine with the exces- 
sive cash flow to allow a private monopoly to amass significant market power over 
the in-formation superhighway. 

The presence of one of the Baby Bells at the core of each of the aUiances seeking 
to create a megafirm to own and operate the superhighway attests to this potential. 
The Baby Bells have the money and control a key point of monopoly control on the 
superhighway. Without proper oversight over their activities, they will amass and 
abuse a great deal of market power.^ 



*The pattern of abuse of market power by the Baby Bells has been documented in Cooper, 
Divestiture * * *, 1991. 



79 

APPENDIX a: regulatory STRUCTURE, INCOME AND THE DEPLOYMENT OF SPECIFIC 

TECILNOLOGIES 

While the aggregate capital expenditure numbers make it clear that companies 
have not been using the massive additions in cash flow to fund investment in the 
network, it is also important to consider the impact of recent changes in cash flow 
and regulation on investment in specific technologies. In order to isolate the effects 
of forms of alternative regulation and increased income on technology deployment, 
a data set was compiled which examines the deployment of four leading edge tech- 
nologies (digital switches, SS7, ISDN and fiber optic cables) since divestiture. The 
data is available for the 22 operating companies. 

In order to test the impact of regulation and income on the deployment of these 
technologies, the status of regulation in each jurisdiction was identified for each 
year. Where one of the reporting operating companies serves more than one state, 
the regulatory form variable is weighted by the number of lines for each state. Fur- 
thermore, the regulatory form variable is weighted by the number of years that al- 
ternative regulation has been in place. Six specific forms of alternative regulation 
were identified — incentive rates of return, banded rates of return, pricing flexibility, 
indexed pricing, price freezes and deregulation. 

An econometric analysis was conducted, controlling for the underlying trend of ris- 
ing deployment of technology and the parent company to assess the independent ef- 
fect ofalternative regulation on local rates. The results depicted in Table A-1 show 
that alternative regulation does not have a significant positive impact on technology 
deployment. Banded rates of return show a negative association with the deploy- 
ment of fiber and SS7. Pricing fiexibility and price freezes show a positive associa- 
tion with the deployment of digital switches. Price indexing and deregulation, ex- 
hibit no statistically significant associations whatsoever. 



Table A-1 — Impact of Alternative Regulation on Tectinology Deployment. Prices and Other 

Measures of Company Performance 

[Regression Coefficients (Bs) and T values; (Statistically significant relationships! 





Digital switch 


SS7 


ISDN 


Tiber 


ROR incentive 










Banded ROR 




—.17 
(3.3) 




— 20 


Pricing flexibility 


.11 
(3.3) 




(2.9) 


Indexed pricing 








Price freeze 


.11 
(4.4) 








Deregulation 








Operating revenue 










Net operating revenue 






88 

(24) 
-71 
(28) 




Net income 


—.40 
(3.5) 













The argument that raising the returns enjoyed by the company will increase the 
deployment of technologies was also tested. Measures of total operating revenue, net 
operating revenue and net income were regressed on the deployment of the four 
technologies (controlling for the underlying trend, RBOC and a scale effect). Only 
three associations are statistically significant and two of them, for the crucial vari- 
able of net income, are negative. This is consistent with my observation that the 
companies tend to take the money and run. 

Policymakers have begun to recognize that restoring a balance in the treatment 
of ratepayers will not only prevent abuse but it will create a level playing field for 
competitor as the information age is opened up to competition. 

• A commitment to reasonable rates based on a cost-based allocation between 
competitive and monopoly services could begin to address the problem of excess 
earnings. 

• Structural separations, which prohibit leveraging HOC assets, could begin to 
address the problem of unequal access to financing. 

• EHmination of market power prior to entry by the Baby Bells into other lines 
of business, to reduce the leverage over the local bottleneck. 



80 

Letter From Reed E. Hundt, Chairman, Federal Communications Commission 

April 26, 1994. 

The Honorable ERNEST F. HoLLINGS, 
U.S. Senate, 
Washington. DC 20510 

Dear Mr. Chairman: This letter is in response to the questions you raised at the 
hearing on February 23, 1994 on S. 1822 relating to the income and investment 
data reported to the Commission by the seven regional Bell operating companies. 
Enclosed is the data you requested as well as a summary of the information. 

Please call upon us if we can provide the Committee any additional information. 
Sincerely, 

Reed H. Hundt. 



regulated income and lwestme.nt total regional bell operating companies 

Set forth herein is information regarding the income and investment data re- 
ported to the FCC by the seven regional Bell operating companies (RBOCs). To give 
a more complete picture of the performance of the RBOCs since 1985, a range of 
data are being provided: construction expenditures, depreciation expense, internally 
generated funds, plant in service, network modernization, and service quality. 

The attached tables and figures are intended to provide an industry overview and 
are summarized below. Should more information be desired, the Commission can 
supply the underlying data on a more detailed basis and by individual company. In 
addition, for the RBOCS as a group, the Commission can provide historical 
overviews of construction expenditures and total internally generated funds going 
back nearly 35 years. 

Construction expenditures (Table 1) have been relatively constant since 1985 (the 
first year after divestiture) in nominal dollars and somewhat lower in dollars ad- 

{'usted for changes in the price of telecommunications equipment. On a per loop 
)asis, construction expenditures in adjusted dollars have declined by approximately 
a quarter. Depreciation allowances (Table 2) increased through most of the 1980's 
as the FCC shortened plant lives and amortized reserve deficiencies. As a result 
construction and depreciation have been roughly comparable since 1988 at around 
$14 billion per year. 

Total internally generated funds (Table 3a) have fluctuated in a narrow range be- 
tween approximately $20 to $22 billion since the mid-1980's. Net income was also 
relatively constant around $8 billion annually until 1992. Net income for 1992 and 
1993 are somewhat difficult to evaluate because the RBOCs reported large non-cash 
expenses associated with announced labor force reduction incentives and the rec- 
ognition of past accrued post, retirement benefits. Net income for 1992 rose to $10.3 
billion if these non-cash expenses are included as income, but declined to approxi- 
mately $6.7 billion, if they are deducted. (See Table 3b.) Mthough booked in 1992, 
these non-cash exf)enses actually cover several years, so the true net income lies 
somewhere in between these two extremes. Net income for 1993 is an estimate and 
our analysis not yet complete. 

Gross (undepreciated) plant in service (Table 4) has grown by a third since 1985 
(from $ 153 billion to $201 billion). Net plant (gross plant less depreciation reserves) 
in service grew oniy modestly (from $113.8 billion to $122.3 billion), and net plant 
per loop declined slightly. The slower growth rate of net plant was due in part to 
the rapid amortization of accumulated reserve deficiencies and to revisions in pre- 
scribed depreciation rates that significantly increased overall depreciation rates. 

The two best measures of network modernization tracked by the FCC are the de- 
ployment of digital switching and signaling. (See Figures 1 and 2) Digital switches 
began to enter the network in the middle 1980s. Digital signaling began to be de- 
ployed in the late 1980s. By the end of 1992 more than half of access lines are 
served by a digital switch and more than two-thirds of access lines have local access 
to digital signaling services. 

Of the wide variety of service quality statistics monitored by the FCC, unsched- 
uled switch outages is one of the most critical measures of performance. Downtime 
minutes per loop expresses outage frequency and severity (duration and lines af- 
fected) in a statistic comparable between companies and across time. Table 5 sum- 
maries the downtime minutes per ioop of the price cap local exchange carriers Al- 
though downtime minutes varies from Quarter to Quarter there has been no discern- 
ible change in performance since the collection of tnis data series began. 



81 

REGULATED INVESTMENT AND INCOME TOTAL BELL OPERATING COMPANIES— Table 1— 

Construction Expenditures 

(Figures in millions; per loop calculations in dollars; Source: FCC ARMIS 43-02 USOA Report) 





Construc- 
tion nomi- 
nal dollars 


Telephone 
equipment 
price indei 


Construc- 
tion ad- 
justed dol- 
lars 


Access loops 


Construction per loop 




Nominal 
dollars 


Adjusted 
dollars 


1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 


14,694 
14,676 
14,530 
14,354 
13,309 
14.514 
14.306 
14,609 
14,300 


100.0 
102.5 
104.9 
104.9 
105.7 
107.4 
1090 
110.7 
112.3 


14,694 
14,324 
13,849 
13,681 
12,587 
13,517 
13,123 
13.202 
12.734 


91.4 

93.9 

96.5 

99.3 

102.6 

105.5 

1074 

110 


161 
156 
151 
145 
130 
138 
133 
133 


161 
153 
144 
138 
123 
128 
122 
120 



Note: Price Indai for Nonresidential Communication Equipment, Survey of Current Business. Table 7 8. and National Income and Product Ac- 
counts. 1959-88. 

Table 2 — Construction Versus Depreciation; Versus Total Internal Funds 





Construc- 


Deprecia- 


Depreciation/ 


Internally 


Funds/con- 




tion ex- 


tion ex- 


construction 


generated 


struction 




penditures 


pense 


ratio 


tunds 


ratio 


1985 


14.694 


10.044 


07 


19,877 


1.4 


1986 


14.676 


11.455 


08 


21,326 


1.5 


1987 


14.530 


13.135 


09 


21,414 


1.5 


1988 


14.354 


13.996 


10 


22,080 


1.5 


1989 


13.309 


13,859 


10 


21,286 


1.6 


1990 


14,514 


13,993 


10 


20.872 


1.4 


1991 


14,305 


13,499 


09 


20,160 


1.4 


1992 


14,609 


13,823 


0.9 


22,609 


1.5 


1993 


14.300 


14,000 


10 


21,900 


1.5 



Table 3a — Sources of Internally Generated Funding 





Deprecia- 
tion ex- 
pense 


Net income 


Total inter- 
nally gen- 
erated 
funds 


Depreciation/ 
tunds ratio 


Income/lunds 
ratio 


1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 


10,044 
11.455 
13.135 
13.996 
13.859 
13.993 
13.499 
13.823 
14.000 


7,527 
8.217 
8,435 
8.772 
8,128 
8,221 
8,187 
10,234 
9,500 


19,877 
21,326 
21,414 
22,080 
21,286 
20,872 
20,160 
22,609 
21.900 


051 
54 
061 
063 
065 
067 
057 
0.61 
54 


0.38 
0.39 
039 
040 
0.38 
0.39 
0.41 
0.45 
0.43 



Note Depreciation plus Net Income do not sum to Total Internal Funds due to omitted sources of casli such as net deferred income tax 
and AFUOC 

Note Net Income and Total Internal Funds for 1992 and 1993 include impact of noncash apenses assoaated with announced labor force 
reduction mcentwes and accountmj changes to recognire past accrued postretirement benefits 



Table 4 — Total Plant in Service 





Gross plant 


Deprecia- 
tion re- 
serves 


Reserves/ 
gross ratio 


Net plant 


Access loops 


Net plant 
per loop 


1985 

1986 

1987 

1988 

1989 


153,552 
163,032 
171.621 
179.446 
187.215 


37,785 
44,840 
53.040 
59,882 
67,640 


0.25 
0.28 
031 
0.33 
036 


115,767 
118,192 
118,581 
119,564 
119,575 


914 
939 
96 5 
99,3 
102.5 


$1,267 
1,259 
1.229 
1,204 
1,165 



82 



Table 4 — Total Plant in Service — Continued 





Gross plant 


Deprecia- 
tion re- 
serves 


Reserves/ 
trass ratio 


Net pUnt 


Access loops 


Net plant 
per loop 


1990 

1991 

1992 


191,412 
195,986 
201,098 


71,333 
75,265 
78,835 


0.37 
0.38 
0.39 


120,079 
120,721 
122,263 


105 5 
107.4 
110.0 


1,138 
1,124 
1,111 



Table 3b — Regional Bell Operating Companies 1992 Cash Flow Provided by Operating 

Activities 

[In millions of dollars] 





Ameritech 


Bell Atlan- 
tic 


Bell South 


NYNEX 


, Pacrtic 
Telephone 


Southwest 
Bell 


US West 


Total 
RBOCs 


Net income/loss 


(408) 


1,403 


1,521 


1,257 


1,122 


1,017 


835 


6,747 


Depreciation and 


















amortization 


1,787 


2,095 


2,697 


2,278 


1,693 


1,593 


1,680 


13,823 


Deferred income 


















taxes — net 


(129) 


(177) 


(60) 


(127) 


(286) 


(101) 


(1) 


(881) 


Unamortized ITC — 


















net 


(65) 


(80) 


88 


(78) 


(58) 


(72) 


(63) 


(328) 


Allowance for funds 


















used during con- 


















struction 


(5) 


(14) 


(9) 


(25) 


(7) 


(12) 


(9) 


(81) 


Net change in other 


















assets and de- 


















ferred charges ... 


(103) 


151 


321 


20 


94 


229 


121 


833 


Net change in other 


















liabilities and 


















deferred credits . 


1,792 


281 


200 


(150) 


348 


94 


250 


2,815 


Other 


126 


15 


(341) 


(48) 


(138) 


(45) 


144 


(287) 


Net cash provided 


















tjy/used in oper- 


















ating activities .. 


2,996 


3,675 


4.417 


3,127 


2,757 


2,704 


2,956 


22,641 



Source: 1992 ARMIS USOA Report 43-02. Table B-2. State ot Cash Flows 



83 



FIGURE 1 — TOTAL REGIONAL BELL OPERATING COMPANIES AND GTE 

Lines Served by Digital Switches 

(Millions) 




OL-I 



1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 

Year 



100% 



80% 



— 60% 

c 
y 

0) 

^ 40% 



20% 



0% 



Percent of Lines Served by Digital Switches 



j_ 



_L 



1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 

Year 



Figure 2— Total RBOC's 

(In thousands! 



Year 


Access lines 

with access to 

SS7 


Total number 
ot lines 


Petcent of 

total lines 

with access 

toSS7 


Year 


Access lines 

with access to 

SS7 


Total numbei 
ot lines 


Percent ot 

total lines 

with access 

io SS7 


1987 

1988 

1989 


1,035 
10.325 
19,383 


96,457 

99,317 

102,629 


1 

10 
19 


1990 

1991 

1992 


40,198 
57,337 
77,112 


105,643 
107,397 
109,995 


38 
53 
70 



84 



Percent of Total Lines with SS7 Capability j 




1987 1988 1989 1990 

Year 



1991 



1992 



Table 5 — Unscheduled Switch Downtime; Minutes of Unscheduled Downtime per Loop (Over 2 
minutes duration on an annualized basis by quarter) 

(Price Cap LEC's 1991-93] 





1st qtr 
1991 


2d qt( 
1991 


3d qtt 
1991 


4lh qtr 
1991 


hi qtt 
1992 


2d qtr 
1992 


3d qtf 
1992 


4th qtr 
1992 


1st qtr 
1993 


2d qtf 
1993 


3d qtr 
1993 


Ameritech 


0.2 


3.6 


15 


1.8 


3,0 


1.6 


40 


84 


28 


32 


7,1 


Bell Atlantic 


1.6 
20 
2 1 


6.9 
6.4 
3.1 


0.3 

117 

2.4 


0.4 
2.3 
5.2 


1,9 
66 
1.3 


7.4 
6.5 
1.5 


2.7 
77 
49 


1,9 
16 
66 


11 
6 1 
76 


06 
1.9 
3 1 


1.2 


Bell South 


3,0 


NYNEX 


63 


Pacific 


96 


29 


18 


6.2 


16 


2.9 


3 1 


16 


00 


6.3 


7.3 


Southwestern 


2.0 


2.3 


1.4 


21 


13 


35 


11 


18 


40 


3.9 


3.6 


US West 


6.0 


17.9 


34 


71 
9.0 


100 
1.1 


70 
3.1 


24 
7.7 


38 
6.3 


1.8 


6.4 


47 


Contel 


(') 


GTE 


12.0 


9.4 


93 


33 


3.4 


6.2 


36 


2.4 


60 


6.3 


8.4 


Rochester? 






0.0 


10 


00 


07 


00 


0.0 


28 






SNET 






0.2 


0.2 


1.2 


0.1 


4.4 


0.0 


2.0 


17 


0.0 


United 


6.9 


11.7 


6.6 


6.5 


4.6 


6.7 


80 


107 


6.0 


7.8 


4.9 


Average 


4.3 


6.4 


4.1 


34 


3.5 


45 


4.1 


38 


35 


3.0 


5.0 



1 Contel and GTE merjed in 1993 

' Rocliestef's 3d quarter 1993 tiling is incomplete 

Source ARMIS 43-05 Table IVA Minutes ot unscheduled downtime per loop is the quolieflt of the carriers' llne-mlnutes ot unscheduled 
downtime and Its access lines These numbers have been annualized 

The Chairman. So, you are putting on the charts, and we still 
have got to do better with universal service. This perhaps could be 
a reason why we are not doing better with universal service which 
they would charge with, in that they make more money and they 
can buy more movie theaters or whatever else by not providing uni- 
versal service. Do you see my point? 

Mr. HuNDT. Yes, sir. 

The Chairman. That is something — ^you know, we are up here 
working for the public interest and that is what I am looking for- 
ward to. I admire all of these entities that are in there, long dis- 
tance, cable. Bell companies, and everything else, but somebody 
has got to look after the public. And we saw what happened with 
deregulation on the airlines, and we do not want that to happen 
with this one. 

Senator Danforth. 



85 

Senator Danforth. Mr. Chairman, thank you. I think you both 
have clarified what I think is a key issue, and I really agree with 
you except for your calHng the Bell companies Reebok's. [Laughter.] 

The Chairman. Regional Bell operating companies. 

Senator Danforth. I think what you meant is they have the 
jump on their competitors. [Laughter.] 

Let me just really raise the same issue, Mr. Hundt, and correct 
me if I am wrong as I try to state what the issue is here. 

The administration's position, as I understand it, is to utilize the 
so-called VII(c) test in determining whether or not Bell operating 
companies can get into the long-distance service even within their 
own operating area. 

That test says that they can do so provided that there is no sub- 
stantial possibility that they can use their monopoly power to im- 
pede competition in the market that they seek to enter. In other 
words, the assumption is that they still have monopoly power. 

However, the determination would be made by a Department of 
the Federal Government; namely the Justice Department, that that 
monopoly power which they still have would not be used to impede 
competition in long distance. 

By contrast, the bill that Chairman Rollings and others have in- 
troduced says that the Bell companies will be able to get into long- 
distance service within their service area if the Commission finds 
that after receiving factual evidence that there is actual and de- 
monstrable competition. 

In other words, under the administration's position there does 
not have to be actual or demonstrable competition. There can still 
be a monopoly but that monopoly could not be used to impede com- 
petition in the market it seeks to enter. 

Now, this same point is clarified in the letter from Ameritech, 
from Mr. Weiss, that Chairman Rollings referred to. And, again, 
they state the test that they want which is the 8(c) test, no sub- 
stantial possibility that a regional company could use its monopoly 
power to impede competition in the market it seeks to enter. 

Then, Mr. Weiss' letter goes on to say, "this standard does not 
require the elimination of the local exchange monopoly." I want to 
repeat that. This standard does not require the elimination of the 
local exchange monopoly. "Indeed, it assumes the continuation of 
substantial market power if not a de jure monopoly." 

Now, the concern that we have is the bottleneck concern. That 
is that if there is in fact a monopoly in the local telephone service, 
the provider of that service does have an advantage in entering 
long distance. That is why we believe that there should be actual 
and demonstrable competition. 

Am I right so far in stating what the issue is, in your opinion? 

Mr. Hundt. Yes. I think that — let me put it this way. My sur- 
mise is that those people who would advocate the so-called 8(c) test 
imagined that the 8(c) test would include consideration, as factors, 
of the various elements of S. 1822's test. But they would be only 
factors, and they would not necessarily be the exclusive list of fac- 
tors, whereas S. 1822 would presumably be read by some, particu- 
larly those opposing entry, as elevating these factors to some sort 
of absolute barrier. 



86 

It is certainly possible that those who would oppose entry by the 
Bell companies would try to make more out of S. 1822 than the 
drafters intended 

Senator Danforth. Well, anybody who is opposing entry would 
try to utilize whatever the standard is for that purpose; correct? 

Mr. HUNDT. That is right. 

Senator Danforth. There would be a dispute unless it is just 
wide open, unless we say henceforth, without any more to do, the 
Bell companies can get into long distance. Unless we take that sort 
of sky-is-the-limit approach there is going to be some sort of test 
that somebody is going to apply that will, therefore, be contested 
by two parties on each side. 

Mr, HuNDT. Well, that is right, but I do think that the record you 
will be making in these hearings and the other aspects of the legis- 
lative history will help influence plausible interpretations. 

Let me give you another example. S. 1822 refers to market power 
as opposed to using the term "monopoly power." My view would be 
that without any other reference, these terms should be read to be 
essentially synonymous, but I am not sure and I would be quite in- 
terested in hearing, as these hearings develop, whether that view 
is an accurate view or not. 

Senator Danforth. All right. I mean, this is the point of a hear- 
ing. And along with the chairman I would really solicit your views 
as to how various formulations would be interpreted. 

But I think that the basic policy question that we have to resolve 
is should there or should there not be circumstances under which 
monopolies in the local phone business can get into long distance 
in their service areas? 

Mr. HuNDT. Well, there certainly should be circumstances in 
which entry is possible. Those circumstances are obviously set forth 
in S. 1822, and there are different formulations of them. They all 
are attempts to craft a set of words that would lead to the same 
result, which is to make sure that the company, the Bell operating 
company, with the very, very large market share over the local 
telephone market, would not use that market share in any way to 
compete unfairly in long distance. 

Senator Danforth. That is the goal, but there are two very dif- 
ferent assumptions, are there not, with respect to whether there is 
actual competition or whether there is not actual competition. 

Mr. HuNDT. Well, as I mentioned before, I am not sure that they 
are so radically different. I think that under the 8(c) test it is cer- 
tain that anyone would consider as factors all of the language that 
is referenced in S. 1822. And it may well be that in an operational 
sense there is not a radical difference between these tests. 

And as I know from my long experience as an antitrust lawyer, 
and mentioned before, the facts really are going to be determina- 
tive under either test. 

Senator Danforth. Well, my time is up. I do hope we pursue 
this. I doubt that we are all talking about exactly the same thing 
with simply different words. I think that there really is a fun- 
damental difference here that, Mr. Chairman, I really believe is the 
heart of what I think is the most difficult issue that we have before 
us. I hope we will continue to pursue this. 

The Chairman. Yes, sir. Senator Stevens. 



87 

Senator Stevens. Thank you. I was pleased to hear the chair- 
man make the offer to you to come forward with some language in 
some of the areas pointed out by your testimony. 

On page 15 of your testimony, the one that was given to us in 
advance, you raise the concern that I have raised about the univer- 
sal service concept and suggest that States should work with the 
FCC to establish a consistent national universal service policy. 
That is very important to us, I think, the States with large geo- 
graphic area and small population, 

I would like to ensure that some of the areas you have suggested 
that are important and Secretary Brown too, access to schools, ac- 
cess to hospitals, access to libraries, will be uniform. 

We are not dealing with a postage stamp rate any more, are we? 
We are not dealing with a — Senator Inouye and I worked for years 
trying to bring about rate integration. I do not know if you are fa- 
miliar with that. But it used to be on the television you would see, 
these rates apply except in Alaska and Hawaii. Then it was except 
Alaska, and it is still except Alaska. 

Now, I hope that universal service now means affordable in a na- 
tional sense. But I wonder — do you think it makes sense for a joint 
board, a Federal-State joint board to look at this concept of univer- 
sal service policy and make recommendations to the FCC as to how 
to achieve that, how to really integrate the concept of this bill as 
it stands now with the States deciding universal services within 
their borders, and the suggestion that you have made with regard 
to a consistent national universal service policy also? 

What would you think about some transitional aspect that we 
build into this bill to allow some consideration beyond what the bill 
says at the judgment of the FCC when that time comes? 

Mr. HUNDT. Well, with respect to a joint board, I certainly ad- 
here to the principle that the FCC can use all the advice it can get, 
but I think that it is absolutely imperative that there be a national 
minimum for universal service. 

And furthermore, I believe that it is going to be imperative that 
in the broadest sense the pool of funds available, to the degree that 
funds will be necessary to subsidize universal service, should be 
drawn on a national level. 

If you were to accept those two principles, I think you would then 
reacn the conclusion that the FCC should have a very significant, 
and probably ultimately predominant authority over the definition 
of "universal service" acting in its role as a creature of Congress, 
because it would not be appropriate for one particular State to de- 
fine "universal service" either too high or too low. Too low would 
not permit its citizens to participate in the national economy to the 
degree that they should, and too high would rely on the expectation 
that some other State would provide the funding through the FCC. 
That would be, I think, an unfortunate result. 

Senator Stevens. Mr. Chairman, we are dealing now with the 
health care reform bill in the Congress, and it has gotten a great 
deal of national attention. It does affect one-seventh of the national 
economy. 

Few people realize this bill affects more than that. The two bills 
together will affect over 30 percent of our economy in the same 
year. Now, Congress and the administration had better be right. 



88 

The real problem that I have about it is the current universal 
service support relies on average tolls and access charges. We are 
now going into a period where we are going to rely upon reasonably 
identified costs of providing such service. 

Now, let me take you to a little village in Alaska, say Unalakleet. 
It does not have a hospital. It does not have clinic. It has a commu- 
nity health aid who has probably got a high school degree. And 
that person, usually a very able young woman, is going to spend 
about 50 percent of her time on the telephone connected up with 
some basic advisor on how to provide health care to the residents 
of Unalakleet. 

And she has got a computer and she has got a modem. And she 
can send over the computer some ultrasound, as a matter of fact, 
of some of the patients in OB, or she can send an x-ray by her com- 
puter, and someone can read it and get back to her and tell her 
whether it is serious enough to fly them into Anchorage, which is 
1,000 miles away, or whether she ought to be able to set it herself. 

Now, I do not think people think about those things when they 
think about this telecommunications service and what it means to 
be put onto a basis where we are now going to pay the reasonably 
identified cost of providing such service. That cost of that 1,000 
miles is just one tremendous difference between the cost of an 
inner city call to an emergency room. 

Now, do you think the FCC is qualified to make those judgments 
as to how we should be charged on a reasonably identifiable cost 
basis in the future? 

Mr. HUNDT. I do think that is very much within the FCC's exper- 
tise. Yes, Senator. And I would think, for example, consistent with 
your point that very few people realize how the technology of tele- 
communications is impacting so many aspects of our lives, you 
were kind enough to invite me to join you later today in making 
a cellular telephone call to the northernmost point in the United 
States to which a cellular telephone call has ever been made or 
ever will be made, Barrow, AK. 

There is an interesting economic phenomenon, as I know you are 
aware. Senator, and that is that mobile telephony may be much 
cheaper as a way of connecting people to the network for many of 
the remote parts of our country. And we need, as we implement the 
universal service mandate explicitly set forth in S. 1822, to have 
resort to all of the technologies, not just the wire line technologies, 
to complete that mandate. 

Senator Stevens. Well, you are right. But as I was mentioning 
to Senator Pressler, if you have two cellular telephones the cost to 
the community is twice as much; is it not? 

Mr. HUNDT. If there is one cell site, it should be that adding ad- 
ditional phones is cheaper per phone. 

Senator Stevens. But not to the user because if I call you on a 
cellular phone to your cellular phone, we are both paying. If I call 
you on a cellular phone to a fixed-base phone only one is paying. 
So, if you look at the community that is depending upon two cel- 
lular phones and has no fixed base, the cost is twice as much. 

I think we ought to back off and look and see what is happening. 
My time is out, but I did write you a letter, and I do not want to 
deal with the letter as I hope you will respond, because I think 



89 

the — you know, the words "carrier of last resort" is not in any of 
these bills, and yet it is in the minds of everyone from the smallest 
local exchange to AT&T. 

I think somehow or another we have got to wrestle with what is 
the carrier of last resort in the next generation, and I hope that 
you will agree. There is implied authonty now for you to determine 
who is the carrier of last resort in effect because you give them or- 
ders to do things. But there is no express authority in these bills, 
and I think that there should be. 

I would hope that you would agree that we should spell out this 
concept of carrier of last resort if for no other reason than to place 
the responsibility for replacement of systems as they age and have 
to be replaced, such as a our satellites. 

So, I look forward to your letter. I hope you will give me an an- 
swer in that letter. 

Mr. HuNDT. Thank you, Senator. 

The Chairman. Thank you. Senator Breaux. 

Senator Breaux. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman as well for your testimony and your statement. I think 
it is quite extensive. 

You have decided to punt on a couple of questions, though, in- 
cluding on one that Senator Danforth and Chairman Rollings were 
talking about, which is the type of test that is needed for you to 
do a good job of regulating this industry with regard to the RBOC's 
moving into the long-distance service. 

You speak on page 18 of your testimony about how the bill estab- 
lishes two different standards, one for a long-distance service with- 
in the region and one for service outside the region, and say they 
are vastly different. But you do not comment on the type of test 
that we have in the bill as to whether it is preferable or not. 

Senator Danforth I think correctly pointed out that the test, the 
old 8(c) test and the test that we have in the bill are quite dif- 
ferent. I think the chairman made the point that in the Ameritech 
letter to Senator Danforth, when they spoke about an 8(c)-type of 
test as contained in the modified final judgment as being accept- 
able, that that is not saying that the type of test that we have in 
the bill is an old 8(c) test. 

I read the test in the bill as being quite different, a great deal 
more demanding, much harder to try and reach and meet those 
terms and conditions which are not optional, they are mandatory, 
than the existing 8(c) test of which we have years of litigation and 
case history about what the courts and the FCC means when we 
talk about not using a monopoly power to impede competition in 
the market that you seek to enter. 

So, I think I agree with Senator Danforth's position and the fact 
that the test in the bill and the old 8(c) test are different. Do you 
agree with that? 

Mr. HUNDT. Well, I think it is a question of degree. I was assert- 
ing my view that they were not possibly as radically different as 
some members in the business community have been asserting, but 
I certainly recognize that they are different. 

Senator Breaux. The concern I have really is the fact that we 
introduce new terms not defined. I can see the RBOC's hiring con- 
sultants and attorneys, and the long-distance carriers doing the 



90 

same thing, and panels of experts and that being submitted to you, 
and that being litigated because it has never been litigated before. 
Let us go to the courts. We are back into a Judge Greene situation. 
Instead of tightening it up we are actually lengthening it. 

Let me ask you about the test itself in the bill. Actual and de- 
monstrable competition — is there a history of what that means in 
communication law? 

Mr. HUNDT. There certainly is a history of the Federal Commu- 
nications Commission tracking and being intimately aware of the 
development of actual competition. I do not know personally of a 
history of a legal interpretation of the phrase. If there is that par- 
ticular history, I will be happy to inform you in writing. 

Senator Breaux. The concern I have is that they say actual and 
demonstrable is the threshold that you have to show. Then they 
say really what it amounts to, because when they say actual and 
demonstrable competition exists when — I take that to be a man- 
date that anybody who wants to show that has to come in and 
show that the services are available from at least one other pro- 
vider that is unaffiliated, that services have to offered predomi- 
nantly over facilities not owned or controlled by the Bell compa- 
nies — that is easy to prove, I would imagine — but are comparable 
in geographic range, function, quality, and price. 

And the third part of that ingredient is that it has to be sub- 
scribed to by a significant number of persons. Yet, that is not de- 
fined in the legislation as well. 

I am concerned that we have a whole new test here. And the 
statement by Secretary Brown is that we prefer a different ap- 
proach in which the Department would administer the current test 
of 8(c) of the modified final judgment. 

My question to you is can the FCC, using the existing 8(c) test 
which has been litigated for years, adequately handle the question 
of when regional Bell companies with monopoly power should be al- 
lowed into the long-distance service? Or, do you need a completely 
new test in order to be able to carry out that guarantee to the 
American public? 

Mr. HuNDT. Well, if you would permit me to speak on behalf of 
the Agency and not on behalf of myself, so as to distinguish the 
two, on behalf of the Agency I am absolutely confident that the 
Agency has the expertise to apply any test that Congress would 
charge it with applying, and I would love to participate in that task 
if we were given that task. 

I would say that if the test we were given was the 8(c) test, I 
am quite confident that any company opposing entry would come 
in with voluminous briefs giving us the facts that correlate to all 
of the aspects of S. 1822. 

Senator Breaux. But at that point you have the option to look 
at all of them, to weigh them, to see how much of an effect it has 
in this area. You would look at other factors as well. Are there 
other factors you would look at? 

Mr. HUNDT. That would be right. For example, under our public 
interest test, that would be the approach that we would follow. And 
what I meant to be saying was that I believe we have the expertise 
to handle those arguments which would be opposed to us by those 
who wish to deny entry. 



91 

Senatx)r Breaux. Is it not possible under the existing 8(c) test to 
look at factors as to whether they should be allowed into this mar- 
ket other than the three in the bill that we are talking about 
today? 

Mr. HUNDT. Is it not possible to look to other factors? That ques- 
tion was very seriously considered in United States v. Western Elec- 
tric in 1990. Some limits were put on Judge Greene's list of factors. 
I think he wanted to consider balance of payrnents, and the DC 
Circuit said that he was getting into foreign policy. But with a few 
exceptions I am sure it is possible. 

Senator Breaux. What I am saying is this test in the bill here 
today says three things. If you show three things then you have ac- 
tual and demonstrable competition, because it says when one, two, 
three. 

Now, that to me says that the FCC does not have to consider 
anything else. If I am an applicant under this situation I show 
those three things and I am in. 

Mr. HuNDT. Well, I think that those three things are among 
three different clauses that have to be satisfied as I understand S. 
1822, the first of which being that the petitioning Bell operating 
company would have to show no substantial possibility of using its 
market power to impede competition in the market that it sought 
to enter. 

Senator Breaux. Do you have more flexibility under the existing 
8(c) test, I take it, than under this in the legislation? 

Mr. HuNDT. That is an interesting question — more flexibility. I 
am not sure. 

Senator Breaux. Well, you say you are considering these under 
the existing 8(c) test and you find two of them are there but one 
is not, and the two that are there are really significant and impor- 
tant and, therefore, we can allow the entry. Under this you could 
not do that. 

Mr. HuNDT. Stated that way, that would be right. I do think you 
would be looking at the same facts for all of them, I really do. 

Senator Breaux. But you do not have an ability to set one aside 
under the statute? 

Mr. HuNDT. You could not read them out of the statute. I cer- 
tainly agree with that. 

Senator Breaux. Is your opinion different from that suggested by 
Secretary Ron Brown with regard to this test? 

Mr. HuNDT. I did not hear it as being different. 

Senator Breaux. He suggested we use the existing 8(c) test, and 
that the proposed test in the legislation 

Mr. HuNDT. Oh, you mean the advice to you. I am sorry. I 
thought you meant his opinion as to interpreting it. 

Senator Breaux. No, I am sorry, what he suggested to us. 

Mr. HUNDT. Well, the administration, he did clearly state, would 
prefer section 8(c). With great deference, what I would prefer to do 
is what we are charged by Congress to do, and I would prefer not 
to elect any particular task. 

Senator Breaux. That is too easy to take that position. I mean, 
I think you ought to give us advice either agreeing with the chair- 
man or agreeing with others who disagree. 



92 

Which one can you utilize best to get the job done? I mean, we 
are trying to make sure that we write something that allows you 
to do the job. 

Mr. HUNDT. I think the answer to that question is it depends to 
some degree on how you interpret certain clauses in S. 1822. One 
I mentioned earlier — I think that if market power is synonymous 
with monopoly power it is clear to me, at least, how you would go 
about applying it. If it is not synonymous, we would need substan- 
tially more guidance. 

Another issue I would like to raise is the one I also referred to 
earlier, and that is whether the theory of contestable markets 
would legitimately be incorporated within our application of the S. 
1822 test. I think it should be. I think that is a legitimate way to 
read the language, and I would hope to be edified further on that 
subject during the course of your hearings. 

There are other questions as well, and as Senator Rollings said, 
I would very much like to take up the opportunity to give you those 
details. For example, I can well imagine legions of lawyers charg- 
ing many, many dollars who would debate even the term "signifi- 
cant number of persons." Is that to be measured by revenue or by 
population? 

But I have to say that those legions of lawyers have populated 
our courts under 8(c) as well, and I do not foresee, given the mag- 
nitude of the task here, this bill being a lawyer limitation bill. I 
think it is a question of how much clarity or specificity of guidance 
you would like to give to the FCC, not a question of whether you 
could discourage any of the telephone companies from hiring law- 
yers. I am sure we could not do that. [Laughter.] 

Senator Breaux. The only difference is in one case you have a 
history of litigation and case law, and in the other you have noth- 
ing yet. 

Mr. HUNDT. Well, I understand you. Senator, and here I at least 
feel the temptation that I felt in private practice to argue either 
way depending on my client. [Laughter.] 

The Chairman. That fellow ought to go to Louisiana. [Laughter.] 

Senator Breaux. He could elected in Louisiana. [Laughter.] 

The Chairman. Market and monopoly are synonymous. They 
were used synonymously by Judge Greene in the original 1982 de- 
cision, and we will get to whatever elaboration you need or specific- 
ity. In other words AT&T, they wanted two competitors rather 
than one. They wanted 75 percent of the market rather than what 
we said substantial. 

We tried to make it flexible and more realistic and easier. From 
the Senator's questions, perhaps we made it more difficult. Let us 
look at it and see because we are using their test. What they really 
want is immediate entry. 

And there is a history to this bill and everything else like that. 
That is why you get monopoly and market, for the simple reason 
over on the House side they had to get the Judiciary Committee 
and Chairman Brooks into it, that is why. And I know exactly why 
Secretary Brown testified the way he did, because he told them he 
would go along with that particular measure. 

But we thought it was more efficient, less lawyerly, and less com- 
plex to go right to you, to the FCC, and have you interpret it. But 



93 

anything more you need now, Mr. Chairman, you let us know, and 
any suggestions that you have — and talk to your colleagues on the 
Commission — we would appreciate that. 

Thank you very, very much, Chairman Hundt. We have got two 
other distinguished witnesses. We appreciate it very much. 

We understand that Dr. Miller and Mr. Squadron were both 
ready to testify last September on the Danforth-Inouye bill, and we 
had to apologize to both of you at that particular time. We could 
not fit you in, but promised you would be heard at the next hear- 
ing, and this is it, so we welcome you both, and we appreciate your 
indulgence. 

Dr. Miller, I am sorry about your neck brace there, but you take 
your time, as you wish. We will include the testimony and state- 
ments in their entirety, and you can summarize them as you wish. 

STATEMENT OF DEAN J. MILLER, COMMISSIONER, IDAHO 
PUBLIC UTILITIES COMMISSION 

Mr. Miller. I hope, Mr. Chairman, my unfortunate orthopedic 
appliance does not create the impression that State regulators are 
stiff-necked or inflexible. [Laughter.] 

By virtue of uncontemplated surgery, however, I am compelled to 
have this on today. 

On behalf of the National Association of Regulatory Utility Com- 
missioners and the State commissions of the United States, I would 
like to express our appreciation to you and to Senator Danforth 
and to the committee both for your efforts in the leadership that 
is apparent in this endeavor, second for your invitation to be 
present to us today, and third to the committee staff and your indi- 
vidual staffs for their willingness to discuss the issues that are as- 
sociated in this bill with us. 

We are very anxious to have an opportunity to continue to par- 
ticipate in that discussion. I recognize though, Mr. Chairman, the 
time that has elapsed here this morning. We have filed a formal 
written testimony. I had prepared an additional very eloquent oral 
statement which I would, with your permission, be prepared to 
submit as part of the record without reading it in full this morning. 

The Chairman. Both will be included. 

Mr. Miller. And with that, Mr. Chairman, I would make myself 
available for questions. 

[The prepared statement of Mr. Miller follows:] 

Prepared State.ment of Dean J. (Joe) Miller 

Good morning and thank you for giving me the opportunity to comment on the 
Communications Act of 1994, S. 1822. My name is Dean J. (Joe) Miller. I am a 
member of the Idaho Public Utilities Commission and Chair of the National Associa- 
tion of Regulatory Utility Commissioners (NARUC) Committee on Communications, 
on whose Behalf I appear today. 

As you may know, the NAKUC is a quasi-governmental, non-profit organization 
founded in 1889. Within our membership are the governmental agencies of the fifty 
States, the District of Columbia, Pucilo Rico and the Virgin Islands which are en- 
gaged in the regulation of utilities and carriers. Our chief objective is to serve the 
consumer interest by seeking to improve the quality and effectiveness of government 
regulation in America. More specifically, the NARUC is composed of, inter alia. 
State and territorial officials charged with the duty of regulating the telecommuni- 
cations common carriers within their respective borders. As such, they have the obli- 
gation to assure the establishment of such services and facilities as may be required 



94 

by the public convenience and necessity, and the furnishing of service at rates that 
are just and reasonable. 

INTRODUCTION 

Recognizing the significant changes in markets and technologies that have oc- 
curred since the Communications Act of 1934, S. 1822 proposes comprehensive re- 
form of telecommunications regulation. The states agree tnat reform is necessary 
and endorse this effort. Given, however, the large number of topics addressed by the 
bill, in this testimony we limit our comments to general observations regarding mat- 
ters which are of the greatest regulatory concern to the states. We, along with indi- 
vidual states, may wish to submit specific suggestions for changes to statutory lan- 
guage at a later time. And, we appreciate the ongoing opportunity afTorded us by 
Uie Committee staff to discuss technical and policy details. 

COOPERATIVE FEDERALISM— IN GENERAL 

Just two weeks ago, the NARUC testified before the Telecommunications sub- 
committee of the House Energy and Commerce Committee regarding similar legisla- 
tion under consideration by tnat body.i There, we argued for a conceptual frame- 
work that balances federal/state responsibilities in a fiexible way that will help en- 
sure a smooth and successful transition to competition in the local exchange market. 
Our framework is loosely modeled in part after the state/federal relationship as cre- 
ated by the Public Utilities Regulatory Practices Act of 1978, or more commonly 
known as PURPA.2 NARUC also recommended that Congress establish national pol- 
icy goals to achieve, among other things, local competition and that the Federal 
Communications Commission (FCC) promulgate broad guidelines consistent with 
these goals. States would be given the responsibility and flexibility to meet the over- 
all national policy. 

Although S. 1822 takes a slightly different approach, we believe the bill is closer 
than any other legislation released to date in striking the proper balance of federal 
guidance coupled with local fiexibility. As we will discuss in greater detail, flexibility 
and adaptability should be key goals of reform. We live in a communications world 
where change has become a permanent condition. It is precisely in such a world that 
flexibility and adaptability oecome critically important. Business needs flexibility 
and adaptability in order to compete. At the same time, state and federal regulators 
also need flexibility so that they are able to accommodate to change and stul fulfill 
their fundamental responsibility to safeguard the public interest. 

REGULATORY REFX)RM 

The establishment of national policy direction and goals is needed in tele- 
communications due to the changes with in the industry and the technology. Com- 
petition in the local exchange market and preservation and advancement of univer- 
sal service are goals that the NARUC supports. The members of NARUC realize 
that achieving these national goals will require some revision of federal and state 
regulatory responsibilities. 

Our concern is that regulatory reform not translate into the elimination of intra- 
state regulation before eficctive competition exists. While in many markets, comf)eti- 
tive entry would have the beneficial effect of lowering prices, expanding choices for 
consumers, and increasing efficiency, there are rural, less dense, or uneconomic 
markets which may not be capable of sustaining robust competition. In these cases, 
state policies must ensure that selective by-pass by a few large customers will not 
saddle remaining customers with significant lost revenues and stranded plant and 
that basic consumer protections are assured. 3 

We support a strong state role in the establishment of a new regulatory frame- 
work because, as we have said before, state commissions are much better positioned 
to make the myriad of complex regulatory decisions involving pricing, cost allocation 
and interconnection arrangements necessary to a successful transition to competi- 



iH.R. 3636, the 'National Communications Competition and Information Infrastructure Act 
of 1993." A copy of NARUC's testimony is attached as Appendix A. 

2 Under PUkPA, states are allowed flexibility to implement policies to reach a national goal. 
PURPA provides a model in which the competing goals of national uniformity and concern for 
local conditions are balanced. 

3 Existing legal and statutory barriers are relics of a by-gone day when competition in the 
local exchange marketplace was not even imagined. These existing prohibitions should not be 
considered as opposition to competition as they can easily be removed by state legislatures. Our 
concern is that preemption of states not restrict a state commission's ability to provide terms 
and conditions under which these services could be provided. 



95 

tion. Moreover, state commissions, who have the direct responsibility for handling 
consumer complaints on a daily basis, are very aware of the needs of residential and 
business customers in their states. As a result, states, not the federal government, 
are better equipped to protect local rates against the impacts of uneconomic buys, 
safeguard competitors against predatory pricing and provide the appropriate regu- 
latory flexibility necessary for the dominant provider to compete fairly. 

In addition, we believe that state oversight of the transition will enhance, not im- 
pede, the achievement of local competition. The experience of states that have insti- 
tuted pro-competitive policies underscores the complexity involved in unbundling 
the network and creating a fair and level playing field. Also, vigilance is required 
to ensure that new providers have eaual access to the dominant carrier's network. 
Without close attention by state regulators to pricing practices, interconnection ar- 
rangements and service quality in each of their states, there is a real potential for 
rate shock and service degradation.'* States are in a superior position to address 
consumer complaints and intercompany disputes which will undoubtedly arise as 
they did followmg divestiture. 

The NARUC believes that S. 1822 is closer, than any other legislation released 
to date, to striking a proper balance between ensuring uniformity among states and 
giving state regulatory commissions the flexibility needed to protect telephone cus- 
tomers and preserve universal service. 

NARUC generally supports the provisions of Section 230 to the extent they recog- 
nize that importance of preserving state regulators' authority to provide terms and 
conditions under which local exchange services are provided. These conditions may 
prove to be essential to the smooth functioning of a multi-provided network, at least 
during the transition to competition, while assuring that consumer protections are 
guaranteed in those markets which may not be capable of sustaining robust com- 
petition. 

NARUC also supports the provision in Section 230(d) that allows states to imple- 
ment interstate equal access and interconnection requirements, as long as they are 
not inconsistent with federal regulations. As is the case with federal universal serv- 
ice guidelines, convening a F"'edcral-State Joint Board could advance federal-state co- 
operation in developing equal access and interconnection regulations consistent with 
national pro-competitive oDjcctivcs, thereby minimizing the potential for federal pre- 
eniption. 

Finally, the NARUC supports the pricing flexibility provisions included in this 
bill. Currently, 33 states nave already implemented pricing flexibility criteria for 
services which have been found to be competitive. As competition begins to grow in 
the local exchange markets, states can be counted on to approve pricing flexibility 
plans while ensuring that rates for those areas and services which are not competi- 
tive remain just ana reasonable. 

UNIVERSAL SERVICE 

Protecting this Nation's longstanding commitment to universal access to afford- 
able basic service during the transition to competition is one of the most critical 
challenges facing federal and state regulators. We support the legislation's provision 
which would delay the elimination of state entry barriers until the universal service 
provisions have been implemented. 

We are also supportive of the provision which explicitly directs all telecommuni- 
cations providers to contribute to universal service and provides flexibility to tele- 
communications providers and states with regard to the form that contribution may 
take. We believe that it is this flexibility that will help to ensure a smooth transi- 
tion as the concept of universal service advances. 

We are encouraged by the bill's intent to reserve primary responsibility for defin- 
ing and implementing universal service to the states. However, we are concerned 
that the bill, as currently drafted, could limit the options of state regulators in de- 
termining the definition of universal service. Specifically, Section 20lA(b) could per- 
mit the FCC to set guidelines that effectively mandate the level of universal service 
that must be provided in each state. Moreover, there is nothing in the bill that 
would prevent the FCC from establishing a level of universal service above the mini- 
mum voice grade required by the bill. This seems to contradict the intent of Section 
201A(c), which delegates primary responsibility to the states. We would welcome the 
opportunity for further discussion to clarify this relationship. 

Along these same lines, the NARUC also believes further discussion is warranted 
of section 201A(bXA) that requiics the FCC to determine a charge for universal 



<In a more comp)etitive environment, companies will understandably focus their resources on 
the f)otentially more profitable markets and seek to shift cost to their captive customers. 



96 

service based ufwn a "reasonable" share of joint and common cost. Since most of the 
components of universal service are local service elements, this seems to carry with 
it the potential of involving the FCC in local rate setting. States should retain the 
ability to determine the best means of pricing the intrastate components of univer- 
sal service. 

With respect to the development of universal service polices contemplated by Sec- 
tion 201A(b), the NARUC prefers the establishment of a Federal/States Joint Board 
for the purposes of providing input to the FCC's process on universal service issues 
rather than participating in a formal rulemaking process. We believe the Joint 
Board process provides a better forum in which the criteria by which federal and 
state regulators can assess whether certain services and capabilities should be con- 
sidered in the definition of universal service and funding options can be explored 
and developed. This process has worked reasonably well in the past. In fact, while 
FCC decisions that have been fashioned through the joint board process have been 
the subject of challenge in the courts, we are unaware of any court having ever re- 
versed or remanded a decision made by the joint board. 

INFRASTRUCTURE INVE^MENT 

The NARUC endorses the encouragement provided by section 229 (c) for states 
to provide incentives that hasten infrastructure development. The states, in fact, 
have been leaders in this area. More than 30 states have already adopted programs 
aimed at furthering this goal. In 1993 alone, six states passed laws or resolutions 
relating to infrastructure deployment. s In addition, 19 states have already begun to 
implement distance learning programs and trials.s 

The NARUC supports policies that provide opportunities for all subscribers to 
take advantage of new network capabilities and services. Section 229(a), however, 
could profit from a clarification making clear that a single network that offers voice, 
data and video services is not necessarily required but that this objective can be also 
accomplished through multiple networks providing each or all of these services. 
Today, most residential customers have access both to a local telephone company 
and a cable TV system, which in combination, provide these customers with access 
to voice, data and video services. The legislation should not preclude infrastructure 
deployment to rural and non-competitive markets through one or more networks. 

We are concerned that section 229(0 does not fully reflect the magnitude of prob- 
lems associated with respect to allocation of broadband deployment costs between 
local exchange and competitive services and between state and federal jurisdictions. 
The costs of such deployment are likely to be enormous. We believe this section 
should explicitly establish as a cost allocation principle the directive that basic ex- 
change customers who do not desire or use such facilities should not be unfairly bur- 
dened with their costs. Additionally, States should have a role in determining cost 
allocations between local exchange service and competitive services and between ju- 
risdictions. This, as noted above, is a topic traditionally delegated to the joint board 
process.'^ 

INTERLATA SERVICES 

Title IV, dealing with Authorized Activities of Bell Operating Companies, is both 
one of the more controversial provisions and one of the most perplexing from a pub- 
lic policy point of view. And, with respect of interLATA services, the provisions of 
the bill contrast quite sharply with those of a bill addressing the same topic now 
under consideration in the House of Representatives.^ 

While NARUC has not yet had the to opportunity to adopt a formal position with 
respect to H.R. 3626 vis-a-vis the approach taken in this legislation, we can offer 
some general observations regarding the difficult question of when to permit BOC 
entry. 



"The states are Alabama, California, Connecticut, Mississippi, New Mexico and Oklahoma. 
(See, "Deregulation, Competition, Infraslruclure Top '93 State Laws" State Telephone Regula- 
tion Report, December 30, 1993, page 5.) 

oSee, NARUC Report on the Status of Competition in Intrastate Telecommunications. The 
National Association of Regulatory Utility Commissioners (NARUC), November 9, 1993. 

'Along these same lines, we urge that consideration be given to the costs of implementing 
the other reforms proposed by S. 1822. For example, local exchange number portability, if the 
recent experience with 800 number portability is any guide, is likely to be extremely expensive. 
The proper allocation and recovery of these costs is a matter in which the states have a signifi- 
cant interest. 

8See, H.R. 3626, "The Anti-Trust Reform Act of 1993," sponsored by Messrs. Brooks and Din- 
gell, hereaOer H.R. 3626. 



97 

The difTicult public policy task here is to, on the one hand, guard against pre- 
mature entry thereby denying the possibility of anticompetitive behavior and im- 
proper leveraging of monopoly power in related markets. This is a legitimate policy 
goal that the states endorse. At the same time, BOC entry could bring with it 
consumer benefit in the form of lower prices and more competitive markets. An 
entry standard that is "to high," thereby delaying or preventing consumer benefit 
may be as bad as one that is too low. 

As we understand it, S. 1822 imposes two types of safeguards that must exist be- 
fore BOC entry into long distance would be permitted: carrier obligations and a com- 
petitiveness test. Under the first, the BOCs are required to engage in further net- 
work unbundling and number portability.^ Under the second entry is precluded 
until BOCs have at least one facilities based comp)etitor providing service of "com- 
parable geographic scope" and serving a "significant number of subscribers." lo 

While this federally mandated competitiveness test would undoubtably achieve 
the goal of precluding premature entry, there is the possibility that the test may 
"over-shoot" the mark and may even result in unintended consequences. For exam- 
ple: 

— It is likely in rural states that some local markets may not develop any 
competition at all for a long period of time, if ever. These states would be un- 
able to capture public benefits that might flow from BOC entry into the inter- 
state, inter-LATA markets.' i 

— The S. 1822 competitiveness test may inadvertently invite only selective 
entry into the local market. That is, MCI, for example, could enter a local mar- 
ket and only serve a small number of high volume customers thus capturing 
significant revenues but a relatively small share of customers. Under this sce- 
nario, the test would never be met and the BOCs would be denied entry into 
MCI's existing long distance market. 12 
For these and other reasons, some state commissioners have been attracted to the 
approach in H.R. 3626.13 There, in respect to the intrastate, interexchange market, 
individual state commissions are authorized to permit or deny BOC entry. This ap- 
proach appropriately recognizes that as is the case with local exchange markets, 
market conditions will vary among states with respect to the intrastate toll market. 
We also think the state can be relied on to impose appropriate conditions on entry 
that would tend to encourage competition rather than permitting anti-comf)etitive 
behavior.i* The evidence to date confirms this view. Several states have gone fur- 
ther than the FCC in providing ATi&T with regulatory Hexibility in the interLATA 
market. Several states nave authorized intralATA presubscription. 

In light of the foregoing, we encourage further examination of these two ap- 
proaches with a view toward identifying common elements and the possibility rec- 
onciling the two. NAI^UC would welcome the opportunity to participate in that dis- 
cussion. 

INFOR.MATION SERVICES 

The NARUC has opposed preemption of states' ability to regulate intrastate infor- 
mation services {People of California v. the Federal Communications Commission, 
Nos. 92-70083 et al.). Therefore, we cannot endorse Sec. 234(c) of S. 1822 which pro- 
hibits state regulation of rates, terms or conditions of information services. Given 
the intrastate character of enhanced services, state regulators are more appro- 
priately positioned to determine how these intrastate and local services shoula be 
provided. Because state regulators are more familiar with both a BOCs local oper- 
ations — through constant oversight of at least 80 percent of its activities — and with 
local market conditions, they arc more apt to recognize unique local operational cir- 
cumstances, and therefore are better suited than the FCC to protect consumers from 
such abuses as cross-subsidization. The local environment, e.g. number of competi- 



»See, Sec. 230 (d), (0, (g). 

10 See, Sec. 235(c). 

11 For example, in my home town of Boise, Idaho, we have not yet received a single application 
from even a competitive access provider (CAI') to provide service. This, notwithstanding the fact 
that we have had a virtual open entry policy for many years. To paraphrase the currently popu- 
lar expression, "we built the ball park but they didn't come." 

1^ Along similar lines, the requirement that competitors be "facilities based" may invite only 
selective entry by re-sellers who would take advantage of the LEG unbundled network that is 
mandated by the Bill. In this context, again, the competitiveness test would not be met notwith- 
standing significant competitive penetration into the LEG market. 

13 See, H.R. 3626, Sec 102(b). 

i*The states, no doubt, would require that in developing their rates, the BOCs impute to 
themselves the access charges that are paid by competitors thereby guarding against unfair 
pricing. Gonsumer balloting and "1+" prc-sub.scriplion would likely be required also. 



98 

tors, customer demographics, local BOC's history of engaging in improper cross-sub- 
sidization between regulated and nonregulated services, etc., for BOC enhanced 
services in, for example. New York is likely to be significantly different from the 
environment in States like Alaska or Louisiana. State regulators are also more fa- 
miliar with the procedures and policies they apply to BOC service. Thus, they are 
also better positioned to gauge tne impact on, and possible needed adjustments to, 
the local regulatory regime caused by safeguards covering BOC provision of en- 
hanced service. The experience in the recent Georgia Voice Mail Case is a perfect 
example of the localized problems the state commission is better positioned to exam- 
ine. 

SUMMARY 

In sum, NARUC supports the overall objectives of S. 1822 — with resf)ect to local 
competition, infrastructure development and universal service — and the general 
framework oy which it seeks to achieve these goals. While we will be seeking clari- 
fications on certain provisions in the legislation as drafted, we believe this legisla- 
tion establishes a legislative framework that gives states the regulatory flexibility 
to respond to the local market conditions ana to ensure that our ratepayers, who 
are also your constituents, will reap the benefits of the new technology, while meet- 
ing the national goals as set forth by the legislation. 

If there is one message that I could leave the Committee today, it would be this: 
As you consider this and other proposals for reform, don't compound the risks we 
all face, endeavoring to cope witn a fast-changing communications environment, by 
imposing a rigid, unbending statutory scheme which eliminates regulatory flexibility 
and adaptability. 



APPENDIX A— TESTIMONY OF COMMISSIONER ROSENBLUM, DEPUTY CHAIRMAN, NEW 
YORK PUBUC SERVICE COMMISSION ON BEHALF OF THE NATIONAL ASSOCIATION OF 
REGULATORY UTILITY COMMISSIONERS, FEBRUARY 9, 1994, BEFORE THE HOUSE TELE- 
COMMUNICATIONS AND FINANCE SUBCOMMITTEE ON H.R. 3636 

Good Morning and thank you for giving me the opportunity to comment on H.R. 
3636, the National Communications Competition and Information Infrastructure Act 
of 1993. My name is Lisa Rosenblum. I am a member of the New York Public Serv- 
ice Commission and a member of the National Association of Regulatory Utility 
Commissioners' (NARUC) Committee on Communications, on whose oehalf I appear 
today. 

As you may know, the NARUC is a quasi-governmental, non-profit organization 
founded in 1889. Within our membership are the governmental agencies of the fifty 
States, the District of Columbia, Puerto Rico and the Virgin Islands which are en- 
gaged in the regulation of utilities and carriers. Our chief objective is to serve the 
consumer interest by seeking to improve the quality and efiectiveness of government 
regulation in America. More specifically, the NARUC is composed of, inter alia. 
State and territorial officials charged with the duty of regulating the telecommuni- 
cations common carriers within their respective borders. As such, they have the obli- 
fation to assure the establishment of such services and facilities as may be required 
y the public convenience and necessity, and the furnishing of service at rates that 
are just and reasonable. 

NARUC supports the principles on which this legislation is based and applauds 
your effort to bring the National Information Superhighway to the public. Like 
members of this subcommittee, the members of NARUC seeK to: ensure access to 
a high quality seamless, open telecommunications network; preserve and enhance 
universal service; encourage development and deployment of an advanced tele- 
communications infrastructure and ensure the equitable cost allocation of new serv- 
ices and networks. 

NARUC also supports many of the principles articulated in the Administration's 
telecommunications policy. We concur in its effort to establish a legislative frame- 
work to encourage private investment, provide open access to the network and avoid 
creating a nation of information "haves" and "have nots." 

NARUC's concerns with the legislation, as currently drafted, fall along these lines: 

1. The legislation, by unduly centralizing authority and decision making in 
the Federal Communications Commission (FCC), will create regulatory gridlock 
and undercut the legislation's primary objective: the smooth transition to an 
open, interconnected competitive telecommunications network. 

2. The legislation's preemption of state authority to establish terms and con- 
ditions of market entry will undercut universal service, service quality and 
consumer protection objectives. 



99 

3. The legislation, by endorsing the deployment of one network to provide 
voice, video and data, may result in costly and unnecessary investment given 
rapid changes in technology and the demands of various markets. 

NARUC believes that the bill can be revised to ensure that the overall objectives 
of the bill would be achieved more effectively and expeditiously. We recommend that 
Congress establish national policy goals to achieve local competition and that the 
Federal Communications Commission (FCC) promulgate broad guidelines consistent 
with these goals. States would be given the responsibility and flexibility to meet the 
overall national policy subject to subsequent federal intervention for failure to act.i 
Such a system would allow states to fine-tune the federal policies to fit local condi- 
tions. Implementation would occur at the state level, avoiding the difficulties re- 
cently experienced with federal implementation of the Cable Act and ensuring a 
smoother transition to competition with a minimum of rate or service disruption.^ 

Below, I will expand on NAIiUCs concerns with this legislation and address the 
changes that NARUC is proposing to H.R. 3636. 

Redefining the Federal/ State Relationship 

While national policy direction is needed in telecommunications and this will in- 
evitably carry with it some revision of Federal and State responsibilities, NARUC 
has serious concerns with the redefinition of responsibilities under this legislation, 
as proposed. 

In its present form, the legislation shiRs responsibility away from the states and 
concentrates it at the FCC rather than creating a federal/state partnership to facili- 
tate the transition. Under the bill, the FCC would have responsibility for such criti- 
cal issues as compensation rules for interconnection and equal access, the criteria 
for allowing pricing fiexibility, the pace of infrastructure development, and the de- 
velopment of service quality standards, and benchmarks. 

State oversight of the transition will enhance, not impede, the achievement of 
local competition. The experience of states that have instituted procompetitive poli- 
cies underscores the complexity involved in unbundling the network and creating a 
fair and level playing field. This regulatory oversight is necessary to protect the 
dominant provider and its captive customers against the rate effects of cream skim- 
ming while protecting new providers against unfair pricing and cross subsidization 
by the local exchange company. Also, vigilance is required to ensure that new pro- 
viders have equal access to the dominant carrier's network Without close attention 
by state regulators to pricing practices, interconnection arrangements and service 
Quality in each of their states, there is a real potential for rate shock and service 
aegradation.3 States are in a superior position to address consumer complaints and 
intercompany disputes which will undoubtedly arise as they did following divesti- 
ture. 

The legislation will create regulatory gridlock by requiring the FCC to undertake 
an enormous amount of additional, substantive work at a time when it is already 
overburdened by the cable reregulation.* All told, under H.R. 3636, the FCC will 
assume responsibility for over 20 new rulemakings, inquiries, and reports and is re- 
quired by the Act to complete them under aggressive deadlines.^ 

Under the bill, the FCC is required, afler 18 months, to review local exchange car- 
rier tariffs which must identify the rate elements needed to open up the network 
and examine whether the charges for these services are cost based for each of these 
elements. Each of these rate decisions requires complex cost allocation studies, 
which are likely to be contested by numerous parties. The FCC would have to re- 
view all of the arguments of the parties across 50 different states and decide wheth- 
er to approve, or modify the tariffs. 



iNARUC's approach is modeled in part after the state/federal relationship as created by the 
Public Utilities Regulatory Practices Act of 1978, or more commonly known as Pb'RPA. Under 
PURPA, states are allowed flexibility to implement policies to reach a national goal. PURPA 
provides a model in which the comf)cling goals of national uniformity and concern for local con- 
ditions are balanced. 

"Using universal service as an example, the states would first have input into the rec- 
ommendations put forth to the FCC via the Joint Board. In addition, afler the FCC has estab- 
lished standards, the states would develop policies consistent with federal polices and the overall 
goal of preserving and enhancing universal service. 

3 In a more comf)etitive environment, companies will understandably focus their resources on 
the potentially more profitable markets and seek to shift cost to their captive customers. 

•*The Cable Act gave the FCC responsibility for 26 new rulemakings, inquiries, and reports. 
(AUard, Nicholas W., Reinventing Rate Regulation, The Federal Communication Law Journal, 
December 1993, page 97.) Furthermore, the Cable Act required additional appropriations for the 
hiring of new employees to carry out the Act There is no reason to think that these limits will 
not affect the implementation of H.R. 3636 as well. 

6 Attached is an outline of the new FCC mandates required by the Act. 



100 

To rebalance the federal/state division of responsibilities in the interest of better 
meeting the objectives of the bill, NAHUC proposes amending the legislation to pro- 
vide states with the clearer responsibility to implement policies consistent with fed- 
erally established objectives. Failure of the states to act would trigger federal inter- 
vention. 

Preemptive Removed of State Authority 

NARUC supports the removal of statutory and legal barriers to competition if 
local loop competition is the federal objective. We agree that the Federal/State Joint 
Board process is a good approach to developing national minimum standards for 
equal access and interconnection. In NARUC's view, however, the legislation's pre- 
emption of state regulation of the terms and conditions of entry is most troublesome 
ana will tie the state's hands in its effort to protect universal service and service 
quality. 

In many markets, competitive entry would have the beneficial effect of lowering 
prices, expanding choices for consumers, and increasing efficiency, rural, less dense, 
or uneconomic markets may not be capable of sustaining robust competition. In 
these cases, state policies must ensure that selective by-pass by a few large cus- 
tomers will not saddle remaining customers with significant lost revenues and 
stranded plant and that basic consumer protections are assured.^ 

In New York State, where the Commission has unbundled New York Telephone's 
network two years prior to similar action by the FCC, the State has certified a num- 
ber of carriers to provide local and private line services. Each of these companies 
are required, as a condition of entry, to provide funding for the provision of tele- 
phone relay service (TRS), 911, and lifeline services and the Commission is consider- 
ing applying minimum quality of sei"vice standards and basic consumer safeguards 
against arbitrary disconnection and billing practices when local dialtone is actually 
provided. These conditions may prove to oe essential to the smooth functioning of 
a multi-provided network at least during a transition period. 

We suggest that Sec. 102(c)(3) (A), (B), & (C) of the legislation be amended to 
make it clear that such conditions are not considered barriers to entry or limitations 
on the ability to provide service. Our proposed amendment to Section 102(cX3) pre- 
serves the federal goal of local loop competition, while allowing states to pursue 
those options which it deems necessary to meet this objective. We believe that Sec- 
tion 102(c)(3) (A), (B), & (C) should be deleted and in its place the following lan- 
guage should be added: 

"(3) STATE AUTHORITY.— Notwithstanding section 2(b), State and local gov- 
ernments shall, after one year after the date of enactment of this subsection, 
not prohibit entry by an entity seeking to provide telecommunications services. 
A state may impose those requirements as are necessary to preserve and ad- 
vance universal service, protect public safety and welfare, ensure the continued 
quality of telecommunications services, safeguard rights of consumers and en- 
sure that rates are just and reasonable." 
Moreover, Section 102(cXl)(A) and Section 102(c)(lXB)(ii) should be amended to 
require carrier compliance with both equal access and interconnection regulations 
prescribed by both tne Commissioner "and the states provided that a state's policies 
are not inconsistent with the federal standard." 

To ensure a level playing field in the transition, providing the local exchange com- 
pany with additional pricing flexibility needs to be carefully calibrated to the degree 
of competition in the market. Section 102(c)(5)(AXi) permits the FCC to grant pric- 
ing flexibility when a service is "reasonably certain imminently to become, subject 
to competition." Section 102(c)(5)(B)(i) then requires states to apply this same cri- 
teria for intrastate services. Many states, however, believe that the presence of ac- 
tual competition, not the threat of future competition, is the appropriate test to de- 
termine whether to grant price flexibility. 

To solve this problem, we believe that the language quoted from Section 
102(cX5XAXi) should be stricken from the legislation. In addition. Section 
102(cX5XB) should be revised to read: 

Upon application, states shall consider pricing flexibility in accordance with 
the criteria established under clauses (i) and (ii) of subparagraph A concerning 
the service or providers that are the subject of such application Nothing in this 



"Existing legal and statutory barriers are relics of a by-gone day when competition in the 
local exchange marketplace was not even imagined. These existing prohibitions should not be 
considered as opposition to competition as they can easily be removed by state legislatures. Our 
concern is that the preemption language of this legislation goes beyond removal of entry barriers 
to prohibit any state law or regulation that could be interpreted as restricting a state commis- 
sion's ability to provide terms and conditions under which these services could be provided. 



101 

subsection shall limit the state authority to consider additional criteria nec- 
essary to ensure that universal service is preserved and advanced. 

Universal Service 

Protecting this Nation's longstanding commitment to universal access to afTord- 
able basic service during the transition to competition is one of the most critical 
challenges facing federal and state regulators. While there is disagreement about 
the extent of the subsidies flowing from business and toll services to support local 
rates at reasonable levels, competition will inevitably place downward pressure on 
the pricing of competitive services, exposing remaining captive customers to in- 
creased prices. States must retain the authority to evaluate new approaches to pre- 
serving universal service, including assessing new market entrants through inter- 
connection charges, and targeting subsides more specifically to those in need. 

NARUC supports the establishment of a Federal IStates Joint Board for the pur- 
poses of addressing universal service issues. In particular, the Joint Board process 
provides the opportunity to develop criteria by which federal and state regulators 
can assess whether certain services and capabilities should be considered in the def- 
inition of universal service and explore funding options.'' 

NARUC's suggested amendment of Sec. 102(cX6XB) relating to universal service 
includes striking the last sentence of this section which reads "A State may adopt 
regulations to implement the Joint Board's recommendations, except that such regu- 
lation shall not, after 18 months aRcr such date of enactment, be inconsistent with 
regulations prescribed by the Commission to implement such recommendations" and 
substituting the following language: 
A State snail: 

(i) Consider the recommendations of the Joint Board for preserving universal 
service. Nothing in this subsection shall prohibit any State from considering 
other approaches provided that within two years after the Commission estab- 
lishes regulations, adopt regulations that are not inconsistent with the univer- 
sal service principles in this section. 
Rate regulation remains the most important tool regulators have to protect uni- 
versal service. To clarify that states retain authority over intrastate tariffs, we sug- 
?est adding the words "in the appropriate jurisdictions" following references to the 
Jommission in Section 102(c)(4) (A) and (B) relating to tariffs. 

Open Platform 

NARUC believes that there is a legitimate federal objective in seeking to ensure 
the availability of advanced telecommunications services in less economically attrac- 
tive areas. However, it strongly urges Congress to refrain from prescribing winning 
technologies. A one-size-fits-all approach may result in costly and unnecessary ex- 
penditures in certain states, particularly if sufficient demand does not materialize 
in all markets. Additionally, technology moves ahead far more quickly than the leg- 
islative process and should today's available technology be mandated, it may soon 
be out oi date, leaving stranded investment in its wake. 

Section 102(dX3XA) should read "The Commission shall initiate an inquiry to con- 
sider the rules and policies necessary to make available open platform service, or 
sufficient network capacity, through one or more networks to services that provide 
a combination of voice and video. The inquiry shall consider the costs associated 
with making access to such serwces available to all subscribers at reasonable rates." 

Cahle-Telco Issues 

Our final suggestion for amendments to H.R. 3636 relate to the elimination of the 
cable telco cross ownership restriction. The safeguards proposed by H.R. 3636 — the 
requirement of a separate subsidiary for programming and a prohibition against 
subsidizing video programing by subscribers of telephone exchange service — will 
help to ensure against unfair anti-competitive practices. States can face significant 
hurdles in monitoring cross subsidization abuses and NARUC believes that the leg- 
islation could be strengthened by the inclusion of additional safeguards that would 
prevent a common carrier video programming affiliate from having recourse to the 
common carrier's assets in the event of default; that reouire assets transferred from 
a common carrier to its affiliate to be valued for ratemaking purposes at the greater 
of net book cost or fair market value; and that provide that a common carrier must 



'While the Joint Board makes recommendations to the FCC, which then issues the final regu- 
lations, the FCC is not bound in any why to follow the recommendations of the Joint Board. 
Because the legislation, as drafted, prohibits states from implementing, after 18 months, regula- 
tions inconsistent with those prescribed by the FCC, the slates may be put in the position of 
enforcing FCC rules and regulations, which would not be either workable or effective in a spe- 
cific jurisdiction. 



102 

offer the services it provides to its video programming affiliates on a tarified basis 
to nonaffiliated interests. In addition, state and federal regulators must be afforded 
access to books and records of the common carrier video programming affiliate upon 

la summary, NARUC supports the overall objectives of H.R. 3636 to open markets 
to competition and to preserve universal service. We strongly believe, however, that 
H.R. 3636 would be substantially imoroved by amendments that would rebalance 
the federal/state division of responsibilities in accordance with practical realities 
and good policy. Such changes can be made while preserving the policy goals that 
are the centerpiece of the Act. States must be given the regulatory flexibility to re- 
spond to the local market conditions and to ensure that our ratepayers, who are also 
your constituents, will have access to an affordable, reliable, and advanced tele- 
communications system. 

The Chairman. How about Mr. Squadron? Could we have your 
opening statement, please? 

STATEMENT OF WILLIAM F. SQUADRON, PRESIDENT, NA- 
TIONAL ASSOCIATION OF TELECOMMUNICATIONS OFFI- 
CERS AND ADVISORS 

Mr. Squadron. Thank you, Mr. Chairman. I have a brief sum- 
mary of my complete written testimony. I want to thank you, Sen- 
ator Danforth and the committee, for the opportunity to testify 
today on behalf of the National League of Cities, the U.S. Con- 
ference of Mayors, the National Association of Counties, and the 
National Association of Telecommunications Officers and Advisors. 

We collectively represent tens of thousands of local government 
officials and elected officials. All over the Nation in communities 
large and small, urban and rural, rich and poor, local officials are 
focusing increased attention on bringing the benefits of the new 
telecommunications landscape to their citizens. 

Local governments support the vision of an information super- 
highway that will stimulate the economy and enrich the lives of 
Americans, and we strongly support S. 1822's vision and effort to 
propel a vigorously competitive telecommunications market. 

Local government organizations have had longstanding policies 
in support of competition as a means of assuring the lowest cost, 
highest quality service to consumers. We have also had longstand- 
ing policies in support of telephone companies providing video serv- 
ices. 

Because local officials have witnessed first hand the eflFects of un- 
regulated monopoly cable service in their communities, we have ad- 
vocated the entry of telephone companies into the video market on 
the same local franchise terms as cable companies. We continue to 
support such entry. 

We are troubled by suggestions that telephone companies should 
be allowed to offer competitive video services under a different set 
of rules. Several years ago, the United States Telephone Associa- 
tion committed to the franchise framework in a letter to the U.S. 
Conference of Mayors, but it now articulates a different view. The 
FCC created a service called "video dialtone" because it wanted to 
stimulate competition to cable and it did not want to wait for Con- 
gress to act, but then it said that video dialtone was not cable serv- 
ice under the law and did not require a franchise. 

Local governments have a responsibility to their communities in 
administering the public rights-of-way that people in those commu- 
nities own. If telephone companies or anyone else wish to use that 



103 

property to provide a for-profit video enterprise, they must get au- 
thorization irom the municipahty that acts as trustee of that prop- 
erty and can assure orderly and safe construction and reasonable 
commitment for use of that property in the community. 

It is imperative that S. 1822 make crystal clear that local author- 
ization should be required for a telephone company seeking to pro- 
vide video services and for video dialtone or its equivalent. This 
will not result in obstacles to the emergence of a competitive tele- 
communications market, as some apparently fear. 

Local governments welcome new entrants for their economic de- 
velopment and consumer service benefits. While regulatory systems 
are inherently imperfect, municipal franchising has an extremely 
successful record. In the 1980's, cable operators all over the country 
received local franchises launching an extremely prosperous indus- 
try while community interests were protected. Telephone compa- 
nies are active in every locality in the country. They should have 
no trouble obtaining similar authorization, and they should not ob- 
ject to making equivalent contributions to their communities. 

We have other specific issues that we urge the committee to in- 
vestigate further in connection with S. 1822, including briefly a 
complete prohibition on the acquisition of any interest oy a cable 
company in the telephone system in its community, and vice versa, 
privacy safeguards for local government information, the impact of 
telecommunications competition on the State and local tax reve- 
nues. 

We believe the committee should move forward with legislation 
in this area, and we look forward to working with the committee 
on all of these issues. Municipal governments want to and must 
participate in this new environment on behalf of their communities 
to make sure that they have access and the institutions in their 
communities have access on a prompt and nondiscriminatory basis 
to the infonnation superhighway. 

We have heard a lot about everyone's dream of connecting 
schools, libraries, hospitals, and other institutions to the informa- 
tion superhighway. Those institutions will not receive access and 
service magically. It will require the combined effort and hard work 
of the public and private sectors in thousands of communities 
across the country. 

The new law must assure that municipal officials can protect 
their communities' disparate interest and assure that the benefits 
of the new era flow to the consumers where they all reside — at the 
local level. 

We appreciate the opportunity to testify today and look forward 
to working with the committee, and as I understand it, my full 
written statement will be included in the record, Mr. Chairman. 

[The prepared statement of Mr. Squadron follows:! 

Prepared State.mr.nt of Willia.m F. Squadron 

I would like to thank the Chairman and Members of the Committee for the oppor- 
tunity to testify today on behalf of the United States Conference of Mayors, the Na- 
tional League of Cities, the National Association of Counties and the National Asso- 
ciation of Telecommunications Officers and Advisors (collectively, the "Local Govern- 
ment Organizations") concerning S. 1822. 

While we have long supported ensuring a more competitive environment to en- 
hance our national telecommunicalions infrastructure, we call on Congress and the 
Administration to make municipal and county leaders full and equal partners in 



104 

building this new information superhighway. Although, global competitiveness and 
the information superhighway occupy much of the focus of this legislation, it is criti- 
cal to assure that our country's communities — large and small, rural and urban, rich 
and poor — benefit from the changes in telecommunications, it is at the community 
level where the true impact of these dramatic changes will be experienced — in peo- 

f lie's personal lives, their jobs, schools, libraries, hospitals, transportation, and pub- 
ic safety. 

The Local Government Organizations welcome the development of a vigorously 
competitive telecommunications marketplace. We believe that the growth of a na- 
tional information superhighway, a network of networks, with multiple providers 
competing in each locality, can result in economic development and jobs in commu- 
nities throughout the nation, indeed, our organizations nave longstanding policies 
in support oi greater competition in the local telecommunications market. Competi- 
tion not only creates the potential for a community's economic growth, but also gen- 
erally results in lower prices and better service for residential, business, and institu- 
tional consumers of telecommunications services. Local government entities are typi- 
cally among the largest users of telecommunications in their communities and 
would benefit from the lower prices that result from competition. 

As custodians of public property, local governmental authorities also have a re- 
sponsibility to ensure that the development of the competitive telecommunications 
maricet is done reasonably, properly and in a safe manner. Moreover, like any other 

firoperty owner, local governments must ensure that those that use public property 
or commercial purposes compensate the public for the use of public property. In 
order to protect and advance the public interest, the legislation must affirmatively 
preserve a local community voice in the emergence oi a competitive voice, data, 
video, and multimedia landscape. Federal policy must allow local governmental enti- 
ties the authority and flexibility to protect local community interests. The access of 
community-institutions like schools and libraries to the information superhighway 
in an orderly, nondiscriminatory way that maximizes public benefits necessitates a 
constructive local government role. Congress must not simply unleash all tele- 
communications providers and leave local interests at the mercy of a "trickle down" 
national telecommunications policy. 

The Cable Communications Policy Act of 1984 ("Cable Act"), as amended in 1992, 
serves as a model of how Congress can ensure that the information superhighway 
develops in a manner consistent with the public interest. In enacting the Cable Act, 
Congress confirmed the right of local francnising authorities to franchise cable oper- 
ators and to ensure that cable subscribers receive appropriate benefits and protec- 
tion. The Cable Act struck an appropriate balance between streamlined regulation 
and public needs and interests. The cable industry has experienced tremendous 
growth and development since the Cable Act was enacted in 1984, while franchising 
authorities — through the franchising process — have ensured that cable subscribers 
received appropriate benefits and protection. The Cable Act demonstrates that local 
regulation in the public interest would be compatible with the development of the 
information superhighway. 

Congress now properly seeks to promote competition to cable operators. At this 
time, telephone companies ("tclcos") have the capability of being one of the few via- 
ble alternatives to traditional cable operators. 

We are encouraged that S. 1822 recognizes that a telco providing video program- 
ming services within its service area is a "cable operator" under the Cable Act. As 
cable operators, such telcos should be subject to local cable franchising require- 
ments. By identifying such telcos as "cable operators," the bill apparently intends 
that such telcos would be subject to local cable franchising requirements. We believe 
that S. 1822 should be amended to make that intent crystal clear. 

We believe that the application of the local cable franchising requirement on 
telcos providing cable services represents the best way to ensure that such telcos 
address local needs. While no regulatory system is perfect, local franchising of video 
providers has been extremely successful. In the 19805 it resulted in the authoriza- 
tion and prosperous growth of the cable industry while simultaneously protecting 
and advancing a community's unique interests. Rather than being a Barrier to 
entry — as some have mistakenly asserted the franchising process facilitates orderly 
entry into the market while addressing the public's property interests in its rights- 
of-way. 

Through the franchising process, local communities can ensure that telcos, among 
other things: 

— provide educational and community communications networks which pro- 
vide local information services responsive to local community needs, such as, 
but not limited to public and educational access channels, facilities and equip- 
ment; 



105 

— provide channel capacity and associated support to assist local governments 
in providing improved services and in improving communications with their citi- 
zens throu^ institutional networks; 

^-compensate local governments for the for-profit use of local public property 
and ri^ts-of-way; 

— abide by local customer service standards and other consumer protection 
measures to prevent inadequate or discriminatory service; and 

— do not discriminate against, for example, low-income neighborhoods. 

Both the video and non-video programming services provided as part of a telco's 
cable service should be subject to franchising requirements. Moreover, the same re- 
quirements should be imposed on all providers of multichannel video programming, 
including wireless providers, to ensure that there is open market entry and uniform 
rules for all participants. 

We also are concerned that S. 1822 may not subject to local franchising require- 
ments telcos providing transport services for so-called "video dialtone" service. The 
Local Government Organizations believe that telcos providing video programming 
services, whether through a subsidiary or on a common carrier transport basis as 
part of "video dialtone" service, should be subject to appropriate franchising require- 
ments under the Cable Act. Local governments have a responsibility toward the 
property that they manage on behalf of their communities. Only through the fran- 
chising process can a community be sure to receive appropriate benefits Tor the com- 
mercial use of its property. 

Moreover, as a potential competitor of a franchised cable operator, it is only ap- 
propriate that a 'video dialtone" service be franchised. Among other things, local 
governments should be able to ensure through franchise requirements that a telco 
providing "video dialtone" transport service: (1) makes transmission facilities avail- 
able to public, educational and governmental users; (2) provides service to subscrib- 
ers throughout a franchise area on a nondiscriminatory basis; (3) complies with 
consumer protection requirements concerning such matters as service, installation 
and billing; and (4) constructs its facilities using public streets in a safe and reason- 
able manner.i 

In addition, S. 1822 should prohibit a telco from buying out, or obtaining any own- 
ership interest in, a franchised cable operator in its telephone service area, except 
in exceptional circumstances subject to approval by the local franchising authority. 
A strict ban is critical in this area to assure that S. 1822's competitive goals are 
not undermined. 

Section 103 of S. 1822 would require "preferential rates" for, among others, gov- 
ernmental users of a telecommunications system that uses public rights-of-way. 
While we support the objective of facilitating usage of telecommunications networks 
for public beef it, the best way to achieve this access to a community's infrastructure 
is through the franchise process. This process allows a local government to identify 
particular needs and negotiate a reasonable arrangement with the telecommuni- 
cations provider, it has operated successfully in the cable environment as munici- 
palities nave received commitments that have jumpstarted governmental, public and 
educational cable channels and institutional broadoand networks. 

The Local Government Organizations also believe that S. 1822 should contain ad- 
ditional privacy safeguards which, among other things, would deter and detect un- 
authorized access to local government information, such as propierty tax records. 
This issue requires careful consideration because of the potential consequences. 

An additional concern for local governments is the revenue implications of S. 1822 
for local governments, such as whether out-of-state telephone companies and other 
telecommunications providers would be required to collect and remit sales taxes on 
goods and information service puixhases made by persons in a local jurisdiction, and 
thereby restore to a level playing field the competition between local merchants and 
out-of-state retailers. 

The Local Government Organizations also believe that the legislation must con- 
tain stronger provisions to ensure that the information superhighway produces the 
local public benefits described above, such as, but not limited to, universal, non- 



iln this regard, the Local Government Organizations particularly are concerned with the Fed- 
eral Communications Commission's decision to allow telcos to provide video dialtone service 
without a franchise pursuant to the Cable Act. The Commission, in an interpretive ruling, con- 
cluded that a "video dialtone" service provider is not a "cable operator" required to have a fran- 
chise under Section 621(b) of the Cable Act. The Local Government Organizations beheve that 
the FCC's interpretive ruling is contrary to the express language of the Cable Act and Congres- 
sional intent. This niling is being challenged in the U.S. Court of Appeals for the District of 
Columbia Circuit by NATOA, the City of New York, other local governments, and cable industry 
representatives. 



106 

discriminatory service, and the provision of public, educational and governmental 
access to the information superhighway. Since local governmental authorities are 
closest to the operations of tne telecommunications networks in their community, 
they should have a role in ensuring that such goals are achieved. 

■fhe Local Government Organizations also are concerned with provisions in the 
bill that would preempt, or would permit the Federal Communications Commission 
to preempt, state and local regulations or statutes that are inconsistent with, or that 
would impair or prevent the operation of, S. 1822 or federal regulations. We do not 
suggest that state and local governments should be allowed to regulate in a manner 
that undermines the goals of S. 1822. We only suggest that Confess grant state 
and local governments some flexibility in regulating telecommunications services. 
We recommend that the bill be amended to preenipt only those state or local stat- 
utes or regulations which are "irreconcilable" with S. 1822 or federal regulation. 

For reasons of both regulatory parity and the need to protect a community's inter- 
ests, it is critical to extend the same regulatory structure that governs the cable in- 
dustry to telephone entry into the video market. This principle applies equally to 
telco entry that involves ownership of programming and to common carrier-based 
provision of video services (so-called viaco dialtone); in both cases, the objective is 
to provide consumers with alternatives to cable through use of public rights-of-way. 

The vision for a highly advanced, robust telecommunications landscape which will 
deliver services that are meaningful to the businesses, institutions ana residents of 
each individual community will be realized only if such communities have a role in 
their development. That role must balance the need for streamlined entry and re- 
laxed but uniform regulation with the needs and interests of people in their own 
unique locales. Localism cannot be administered nationally, and Congress and the 
federal government must not forget the diversity of our nation's communities in de- 
sifipning the new telecommunications environment. 

The Local Government Organizations look forward to working closely with the 
Committee on these issues to make all consumers the true beneficiaries of the new 
information superhighway. 

The Chairman. Well, thank you both. You can understand from 
the questions previously that many of us Senators were very, very 
concerned about the local implications of this particular legislation, 
that the universal service be protected throughout, and we included 
this language here under the regulatory authority: "Nothing in this 
section shall affect the ability of State or local officials to impose 
on a competitively neutral basis requirements necessary to pre- 
serve and advance universal service, protect the public safety and 
welfare, and ensure the continued quality of telecommunications 
services and safeguard the rights of consumers." 

I think that was prompted by you gentlemen or your organiza- 
tions. Is that correct? 

Mr. Miller. That is correct. Senator. Through the cooperation of 
your staff and with discussions with them, that amendment was in- 
cluded, or that addition was included, which we of course endorse, 
and appreciate the committee's receptiveness to our point of view 
on that topic. 

The Chairman. Let the record also show that we are aware here 
at the committee level of the tremendous development going on at 
the local level. In my own backyard, they are just about ready to 
announce the superhighway, information superhighway for our 
State, and that is the cooperation of the independents, the Bell 
companies, the cellular folks, and everything else getting together. 

When we started this initiative back when Vice President Gore 
was here, the bill at that time inferred that the Government — 
Washington would build the superhighway. The fact is that that is 
being built by the entities out in the hinterland right now and need 
not be constructed with Federal funds. 

The onW thing is the protection of universal service and as you 
indicate from your testimony, of the libraries, the schools, and 



107 

other — public television or those kinds of things. I will get together 
with Senator Gorton, because I think he has got a misgiving that 
we are really discriminating against small private business. There 
is no intent of that at all. 

Mr. Miller. If I might add, Senator, I think in our written testi- 
mony we have provided additional detail showing the leadership 
that the States have attempted to provide to date in both the areas 
of — the associated areas of regulatory flexibility and infrastructure 
development. 

I will not go into it in detail, other than to call your attention, 
I think in our formal testimony, to specific factual information with 
respect to the efforts the States have made to date in that area and 
our appreciation in the legislation for continued encouragement 
along those lines. 

The Chairman. Senator Danforth. 

Senator Danforth. I just want to thank the two witnesses for 
being with us, and especially coming back twice, and thank you for 
your patience. 

The Chairman. Thank you. The record will stay open for ques- 
tions. They have these other commitments and they have to move 
along, but we will leave the record open for questions for the wit- 
nesses, and thank you, gentlemen, both very, very much for ap- 
pearing today. 

[Whereupon, at 12:50 p.m., the committee adjourned.] 



S. 1822, THE COMMUNICATIONS ACT OF 1994 



WEDNESDAY, MARCH 2, 1994 

U.S. Senate, 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 

The committee met, pursuant to notice, at 9:35 a.m. in room SR- 
253, Russell Senate Office Building, Hon. Ernest F. Rollings (chair- 
man of the committee) presiding. 

Staff members assigned to this hearing: John D. Windhausen, 
Jr., senior counsel, and Kevin M. Joseph, professional staff mem- 
ber; and Regina M. Keeney, minority senior counsel, and Mary P. 
McManus, minority staff counsel. 

OPENING STATEMENT OF SENATOR ROLLINGS 

The Chairman. The committee will please come to order. 

Today, we will hold the second in a series of hearings on S. 1822. 
Today's hearing will focus on the information services. In particu- 
lar, we want to discuss the provisions of S. 1822 that include the 
agreements reached between the regional Bell operating companies 
and the Newspaper Association of America, on the one hand, and 
the agreement between the RBOC's and the burglar alarm compa- 
nies on the other. In addition, we will hear other provisions of in- 
formation services that seek additional provisions in S. 1822. 

I will include the rest of this statement here in the record. 

[The prepared statement of Senator Rollings follows:] 

Prepared Statement of Senator Rollings 

Today we hold the second in a series of hearings on S. 1822, the Communications 
Act of 1994. Today's hearing will focus on information services. In particular, we 
wiU discuss the provisions ofS. 1822 that include the agreements reached between 
the Regional Bell Operating Companies (RBOCs) and the Newspaper Association of 
America (NAA), on the one hand, and the agreement between the RBOCs and the 
burglar alarm companies, on the other. In aodition, we will hear from other provid- 
ers of information services that seek additional provisions in S. 1822. 

Many companies provide information services in addition to newspapers. We have 
therefore invited an executive from Prodigy, representing the Electronic Publishing 
Group, to discuss the provisions of the bill that extend protections to all providers 
of electronic publishing, including newspapers. We also nave invited a representa- 
tive of EDS Corporation to discuss the information services that do not involve elec- 
tronic publishing. Finally, we are pleased to have before us this morning a rep- 
resentative of small, community-based newspapers that can help to educate us 
about the need for rural newspapers to obtain access to the information super- 
highway under non-discriminatory terms and conditions. 

Each of these parties brings a unique perspective to bear on the goals and pur- 
poses of S. 1822. 1 look forward to the testimony. 

The Chairman. Senator Packwood. 

(109) 



110 

OPENING STATEMENT OF SENATOR PACKWOOD 

Senator Packwood. I have a very brief statement, Mr. Chair- 
man. 

This is the kind of hearing that makes this committee and this 
subject so interesting. And I bet all of you have said from time to 
time it is almost impossible to regulate this business because the 
technology changes so fast. But I am looking at six different people 
here, ana different facets of the technology, and all of them, to all 
of your credit, have helped advance this technology. 

I hope we can work out a bill that satisfies vou all. But, I might 
as well say, I realize we cannot work out a bill that satisfies all 
of you. But, one day, we will reach a place where we will have a 
level playing field, and you will all be having at each other in fair 
competition and, my hunch is, all succeeding. 

Mr. Chairman, there is going to be a bill for a separate adminis- 
trator of Social Security on the floor and, at about 10, I have got 
to go and prepare to handle our end of that bill. 

The Chairman. Yes, I understand. Very good. 

Senator Stevens. 

Senator Stevens. I think this is the most difficult part of this 
bill, Mr. Chairman. So, I am delighted we are having a hearing and 
that we are going to get some diverse views this morning. 

The Chairman. Well, as Senator Packwood has pointed out, to 
get these folks together, at least we got them together at a table 
anyway, physically. But that has been the experience, in that we 
could easily put a bill in on one particular phase, and the other en- 
tity could clock it. We put in another bill on manufacturing, others 
put in other amendments to block it. 

The attempt here is a comprehensive approach, whereby, under 
the aegis of Government being the art of the possible, what pos- 
sibly can we do to bring order out of chaos — namely, get it back 
from all the lawyers and the motions and the judges' control to the 
congressional responsibility administered by the FCC on the one 
hand, and try not to get in the way. We all on this committee ap- 
preciate the dynamism of the technological explosion. 

And, in that light, we have the fundamental responsibility of try- 
ing to maintain the universal service. And that is supreme in my 
mind, because, after all, that has worked extremely well. Every- 
body agrees that we have got the best communication system in the 
world here in the United States. And it has been all premised on 
public convenience and necessity. 

Let me welcome the panel, Mr. Frank Bennack, the president 
and chief executive officer of Hearst; Jack Fishman, the president 
of Lakeway Publishers; Sandra Weis, the director of government af- 
fairs for Prodigy Services; Mr. John B. Lynn, telecommunications 
coimsel, EDS Corp.; David Carter, president of the Central Station 
Alarm Association; and James G. Cullen, president of Bell Atlantic. 

We will begin here on my left, your right. We will recognize Mr. 
Cullen. I take it you have prepared statements. All the statements 
will be included in the record. You can deliver them as you wish, 
but highlight them if you please, because 6 times 5 is 30 minutes, 
it will take us one-half hour before we can get to the questions, 
though we are not going to limit anybody. Senator Bums' prepared 
statement will be included in the record at this point. 



Ill 

[The prepared statement of Senator Bums follows:] 

Prepared Statement of Senator Burns 

Mr. Chairman, it looks like we have a busy schedule this week and next week. 
And if we are successful in getting S. 4 up on the floor, the following week. 

When you hear talk about building a National Information Infrastructure, a lot 
of it focuses on the many new information services and benefits to the averse or 
upper income American consumers. My vision of the National Information Infra- 
structure is a broadband interactive conununications network accessible at afford- 
able rates that also empowers minorities, individuals with disabilities, women, espe- 
cially single mothers and native Americans. This is what I mean when I say all 
Americans. 

As I continue my work to lead this nation into the Information Age of the 21st 
Century, it is my goal to assure access to the National Information Infrastructure 
for minorities, individuals with disabilities, women, especially single mothers and 
native Americans. 

I think communications legislation passed by the ftiU Commerce Committee that 
reaches my goal will advance the economic and social status of these groups of indi- 
vidual more than any pending legislation before Congress. 

I want to say I was pleased to work with Dale Oberly and Chuck Walk from the 
Montana Newspaper Association and the folks over at the National Newspaper As- 
sociation on including localism language in this bill. Community newspapers and 
small broadcasters must have access the the National Information Infrastructure at 
terms and rates to encourage them to continue providing information on a local 
basis. 

In my view every newspaper and broadcaster in Montana should fall under the 
definition of community newspapers and small broadcasters in the Senate bill. Mon- 
tana is a state made up of communities from our largest city of Billings, home of 
the television stations I used to work on KULR and KQTV, to the town of Circle, 
population 931, home of the Circle Banner. The primary providers of information 
in Montana today and in the future are newspapers and broadcasters. 

I want to brag a little to this Committee about Montana newspapers. When I first 
started working on this issue, they opposed mv efforts, actually when Jack Fishman 
who testified before before this Committee's dommunications Subcommittee on July 
24, 1990, he didn't think much of my first bill on this issue. 

Today, Montana newspapers are leading the nation on the use of computers and 
a network over telephone lines to share information and advertising. They listened 
to me and looked for ways to take advantage of the new communications and com- 
puter technology to improve their newspapers and profits. I listened to them about 
their concerns about access to a National Information Infrastructure at affordable 
rates. 

Now Montana newspapers and broadcasters are poised because of the localism 
language I insisted be included in this iegislation to lead the way as my state ap- 
proaches the Information Age of the 21st Century. 

The Chairman. Mr. Cullen. 

STATEMENT OF JAMES G. CULLEN, PRESmENT, BELL 

ATLANTIC CORP. 

Mr. CULLEN. Thank you, sir. I will be brief, Mr. Chairman. 

I do appreciate the opportunity to testify here this morning on 
S. 1822. And, as requested, I will focus my testimony this morning 
on the electronic publishing and information services provisions of 
your bill. 

But before commenting on those provisions, I would like to talk 
yeiy briefly about the history that surrounds these issues. I think 
it is very important to remember that information services was 
never part of the Government's original antitrust case against 
AT&T. There were no bad acts alleged at anv point. In fact, the in- 
formation services prohibition in the original AT&T consent decree 
was added by the Justice Department strictly as a precautionary 
measure. 



112 

That measure proved to be unnecessary. And when the Bell com- 
panies asked the court to remove the ban in 1987, the Department 
of Justice supported that action. AT&T did not oppose it. With all 
parties in agreement, the court of appeals lifted the ban in 1991. 
And the Bell companies have been providing information services 
on an unrestrictea and unlimited basis since that time — nearly 3 
years. 

Indeed, the market has grown. It has flourished. And the compa- 
nies represented by my fellow panelists here today are just a ^w 
of the success stories in this growing market segment. 

Given that brief history, let me just comment on the origins of 
the electronic publishing provisions themselves that are contained 
in this bill. Recognizing the special problems faced by the news- 
paper industry in transitioning from print, with a 100-year history, 
to electronic media. Bell Atlantic attempted to take a leadership 
role in negotiating agreements with the newspaper publishers asso- 
ciations in New Jersey and in Pennsylvania. 

With this as a starting point, our two industries came together 
to negotiation safeguards that could be applied to all regional Bell 
operating companies. In fact, most of the safeguards to which we 
agreed are in this bill. And they represent a very delicate balance, 
^d since I was personally involved in these negotiations, I can tell 
you that perhaps the key element in our success was that all as- 
pects of the agreement were tangible, specific, nitty-gritty, and con- 
crete. We all understood what it meant. Everyone understood what 
was covered. And everyone understood how the rules would work. 

One of my concerns today is that in a number of very important 
areas, S. 1822 goes well beyond the balance that was struck. While 
a number of these changes in language may seem relatively minor, 
they are really very important because they create huge uncertain- 
ties — ^huge uncertainties. Indeed, the definition of "electronic pub- 
lishing" itself has been significantly expanded, and it has become 
so open-ended that it completely alters the terms that the publish- 
ers and the RBOC's worked so hard to craft. 

Let me give you another brief example. Somehow the term "en- 
tertainment" has been added to the definition of "electronic pub- 
lishing." Now, each of us in the room today probably has a different 
definition of "entertainment." Entertainment could be Sega/Genesis 
video games. It could be interactive MTV services. Who knows 
what it really includes? 

I would submit no one. 

There are other examples I would be happy to submit, but my 
point is that, with these changes, the bill totally upsets the balance 
that was previously struck, and creates uncertainty where there 
was once certainty. These electronic publishing agreements were 
very tough to achieve, as were the burglar alarm provisions. Both 
negotiated provisions address key public policy concerns. And if 
such agreements, which have been painstakingly negotiated I can 
tell you, and Mr, Bennack can as well, are now to become just the 
starting point for piling on even more restrictions, this will cer- 
tainly have a chilling effect on any future efforts by industries to 
work out their differences. 

I urge this committee and you, Mr. Chairman, not to undo the 
progress in both of these areas that has been made to date. 



113 

I am also concerned that this bill, rather than provide incentives 
for deployment of information services, will actually deter and 
delay the deployment of those services. Let me just provide you 
with one brief example. S. 1822 contains a section dealing with 
gateway services. The bill appears to say that a telecommuni- 
cations company cannot offer any gateway services unless it offers 
such services simultaneously to all the subscribers in a State. Tech- 
nology, economics, and simple market demand make this sort of re- 
quirement completely unrealistic. 

Again, with your permission, we will submit our comments, and 
we would like the opportunity to work with your staff to discuss 
these changes. 

Finally, Mr. Chairman, I am concerned about the absence of inci- 
dental interLATA relief for the delivery of information services. 
The only sensible way to provide information services is to deploy 
one computer system to serve multiple LATA's. Customers do not 
care about LATA's. But under today's MFJ rules, we must dupli- 
cate these very expensive computers, one in each LATA, across the 
coimtry. 

However, if S. 1822 were to provide immediate incidental relief 
for information services, it would allow companies like Bell Atlantic 
to expand affordable, accessible information services to customers 
in both rural and urban areas. 

Mr. Chairman, I appreciate the chance to come here and to share 
the views of the seven regional Bell operating companies on the 
areas of information services and electronic publishing contained in 
this bill. 

Thank you. 

[The prepared statement of Mr. Cull en follows:] 

Prepared Statement of James G. Cullen 

Good morning, Mr. Chairman and members of the Committee. My name is James 
G. Cullen, and 1 am President of the Bell Atlantic Corporation. I want to thank you 
for giving me the opportunity to testify on S. 1822. 

As requested, I will focus my testimony today on the Electronic Publishing and 
Information Services provision of your bill. Before commenting specifically on the 
bill's components, I would like to briefly review the history surrounding these is- 
sues. 

It's important to remember that the provision of information services was never 
a part of the government's original antitrust case against AT&T. There were no alle- 
gations of "bad acts" at any point. In fact, the information services prohibition in 
the AT&T consent decree was added by the Justice Department strictly as a pre- 
cautionary measure. 

That mesisure proved to be unnecessary, and when the Bell companies asked the 
court to remove the ban in 1987, DOJ supported the action and AT&T did not op- 
pose it. With all parties to the decree in agreement, the Court of Appeals lifted the 
ban in 1991, ana the Bell companies have been providing information services on 
an unrestricted, unlimited basis since that time. Indeed, it has grown into a flour- 
ishing maiket. The companies represented by my fellow panelists are just a few of 
the success stories in this growing market segment. 

Given that histoiy, let me comment on the origins of the electronic publishing pro- 
visions contained in this bill. Recognizing the special problems faced by the news- 
{>aper industry in transitioning from print to electronic media. Bell Atlantic took a 
eadership role in negotiating agreements with the Newspaper Fhiblishers Associa- 
tions in New Jersey and Pennsylvania. 

With this as a starting point, our two industries came together to negotiate safe- 
guards that could be applied to all RBOCs. Most of the safeguards to which we 
agreed are in this biU and represent a delicate balance. Since I was personally in- 
volved in this, I can tell you that perhaps the key element in our success was that 
all aspects of this agreement were descrioed in tangible, specific and concrete terms. 



114 

Everyone understood what was covered by the agreement and how the rules would 
work. 

One of my concerns today is that in a number of very imfwrtant areas provisions 
of S. 1822 go beyond the balance that was struck. While a number of these changes 
in language may seem relatively minor, they are really very important because they 
create huge uncertainties. Indeed, the definition of electronic publishing itself has 
been significantly expanded and become so open-ended that it completely alters the 
terms that the publisners and RBOCs workea so hard to craft. 

Let me give you another example. Somehow, the term "entertainment" has been 
added to the definition of electronic publishing services. Now each of us in this room 
today probably has a different definition of entertainment. "Entertainment" could be 
Sega/Genesis videogames. It could include interactive MTV service. Who knows 
what it includes? 

There are other such examples that I will be happy to submit for the record. But 
my point is that with all these changes this bill upsets the balance that was pre- 
viously struck and creates uncertainty where there was once certainty. 

These electronic publishing agreements were tough to achieve. They address key 
public policy concerns. If such agreements, which have been painstakingly nego- 
tiated, are now to become only the starting point for piling on even more restric- 
tions, this will have a chilling effect on future efibrts by industries to try and work 
out their differences. I urge this committee not to undo the progress we have made 
to date. 

I am also concerned that this bill, rather than provide incentives for deployment, 
will actually deter and delay the deployment of information services. Let me give 
you just one concrete example. S. 1822 contains a section dealing with gateway serv- 
ices. The bill appears to say that a telecommunications company cannot offer any 
gateway services unless it offers such services simultaneously to all the subscribers 
in a state. 

Technology, economics and market demand make such a requirement unrealistic. 
Again, with your permission we would just like to work with your staff on possible 
language changes in the gateway services section. 

Finally, Mr. Chairman, I am concerned about the absence of incidental interLATA 
relief for the delivery of information services. The only sensible way to provide infor- 
mation services is to deploy one computer system to serve multiple LATAs. But 
under today's MFJ rules, we must duplicate these expensive computers in each 
LATA. 

But if S. 1822 were to provide this incidental InterLATA relief for information 
services, it would allow companies like Bell Atlantic to expand afibrdable and acces- 
sible information services to customers in both rural and urban areas. 

Again, Mr. Chairman, thank you for allowing me to share the viewpoints of the 
seven Regional Bell Operating Cfompanies on the information services and electronic 
publishing provisions in S. 1822. I look forward to working with you and your staff 
on further details of the bill. 

The Chairman. Thank you. 

Ordinarily, we just run through everybody, but do you have some 
brief questions, since you have got to go? 

Senator Packwood. I would rather hear the panel. 
The Chairman. Mr. Bennack. 

STATEMENT OF FRANK BENNACK, Jr., PRESmENT AND CHIEF 
EXECUTIVE OFFICER, THE HEARST CORP. 

Mr. Bennack. Thank you very much, Mr. Chairman, 
As you noted, my day job is as head of the Hearst Corp., but I 
am immediate past chairman of the Newspaper Association of 
America, and I am testifying on their behalf today. And the NAA 
is the organization of 1,050 newspapers, the majority of which are 
daily, and they account for about 80 percent of the daily circulation 
in the United States. 

As Mr. Cullen has indicated, during my tenure as chairman of 
NAA and immediately thereafter, I did represent the industry in 
negotiations with the regional Bell operating companies. So, I have 
been involved from the beginning. 



115 

I want to thank in advance you, Mr. Chairman, and all who have 
brought this process — your staffs and other members of the com- 
mittee — ^who have brought this process to where it is. We believe 
enacting legislation is exceedingly important, and I have submitted 
a detailed statement to that effect. But I would like to highlight a 
few of those issues. 

First, safeguards for electronic publishing are needed now, be- 
cause, as you know, in recent years, developments in the courts 
and at the FCC have eroded the protections that competing elec- 
tronic publishers once had from prospective monopoly abuse by the 
regional Bell operating companies. The MFJ restriction against 
RBOC entry into information services was removed, albeit reluc- 
tantly, by Judge Greene in 1991, and the final appeal with respect 
to that was exhausted last fall. 

Also, in 1991, the FCC scuttled its decades-old structural separa- 
tion requirements, allowing the Bells to provide information serv- 
ices on an integrated basis, which previously they were not allowed 
to do — rather than operate through separate subsidiaries, which 
had been the old rule. 

These actions have eliminated any effective protection against 
anticompetitive behavior by the RBOC's at a time when local ex- 
change competition is more promise than reality. Even now, al- 
though there has been progress, the Bells have not entered elec- 
tronic publishing in a major way, or what I would describe as a 
major way, and therefore the Congress is still free to set the rules 
of the road without constraints of major RBOC business investment 
that might have been in place. 

Now is the time, in our view, to enact S. 1822, before the world 
of electronic publishing changes too much and sound policy is left 
behind. 

Second, I would like to point out that significant changes have 
begun to occur in both electronic publishing and local telecommuni- 
cations. And it is possible now to envision the development of 
meaningful competition to the RBOC's in local distribution, in the 
form of PCS and cellular systems, enhancements to existing cable 
companies, and facilities of fiber-based metropolitan area networks. 
While there are economic and legal barriers to the full growth of 
these competing means, we expect that they can offer service that 
is functionally equivalent to that of the RBOC's within the next 5 
to 7 years — perhaps sooner if public policy strongly encourages 
their development. 

And, for this reason, we are delighted that this bill contains a 
host of other provisions which will promote local competition and 
create the market conditions that will be needed for electronic pub- 
lishing to flourish both in the next few years and particularly after 
the safeguards expire. 

Third, it is important to note that the RBOC's still have the abil- 
ity and the incentive to discriminate against competing electronic 
publishers and to cross-subsidize their own electronic publishing 
operations with telephone monopoly revenues. NAA believes that 
the record before the Congress already clearly demonstrates that 
the Department of Justice, the FCC, and the State PUC's do not 
now have the necessary policy guidance to effectively safeguard 
electronic publishing markets. 



116 

The Department encouraged the courts to drop the information 
services Hne of business restriction, as you heard, from the MFJ, 
relying in part on the FCC's guidehnes or safeguards. However, as 
I have noted, the FCC has now eHminated its structural separation 
requirements for RBOC provision of enhanced services, which in- 
clude electronic publishing. 

Most State PUC's have not even been able to address the elec- 
tronic publishing issue. Interestingly, the few that have — and they 
were referred to by Mr. Cullen — such as those in New Jersey and 
Pennsylvania — have endorsed separate subsidiary requirements 
similar to those in 1822. 

From another perspective, we do recognize that participation by 
the Bell companies in electronic publishing could bring competitive 
benefits if the risk of monopoly abuse can be minimized. With a 
view toward achieving an optimum blend of safeguards and market 
participation, we began the dialog that was alluded to last year 
with the Bell companies and with the Congress. After prolonged 
and difficult negotiations, NAA believes that the majority of our 
concerns have been addressed in the compromise which is reflected 
in section 452 of S. 1822. 

In a perfect world, the bar against the Bells would not have been 
dropped, or these safeguards would have been in place before it 
was dropped, but, as everyone knows, we do not live in a perfect 
world. 

Accordingly, this bill allows the RBOC's to provide electronic 
publishing services, but only if they do so through a fully separated 
affiliate. This separation requirement will make it more difficult for 
the RBOC's to engage in discrimination or cross-subsidy, and much 
easier for violations to be detected and corrected. The services that 
must be separated are those which involve the publication of infor- 
mation content and activity that can efficiently be carried out with- 
out integration into network operations. 

These requirements are similar to those the FCC now imposes to 
separate the RBOC's from their cellular affiliates. 

In addition to requiring structural separation, the bill strength- 
ens existing laws against discrimination and cross-subsidy with 
more specific provisions and greater coverage. 

I have described the features of the safeguards in detail in my 
written statement and will not repeat them. However, it is impor- 
tant to note that these safeguards are largely self-executing. The 
FCC will not, upon enactment of this bill, be faced with heavy new 
burdens, long rulemakings, or the need for more staff. 

Fourth and finally, clear competitive safeguards, as provided in 
this bill, will increase investor confidence in electronic publishing 
enterprises. We believe that entrepreneurs are still holding back 
from the kind of investments they might make in electronic pub- 
lishing, concerned by the possibility that the RBOC's will not treat 
them fairly and could easily drive them out of business. 

It is significant that the bill also contains veiy important provi- 
sions that will enable the Bell companies and other electronic pub- 
lishers to work together and add another competitive dimension to 
the marketplace. And the bill specifically encourages joint ven- 
tures — nonexclusive joint ventures — and teaming arrangements be- 
tween the RBOC's and electronic publishers. These ventures re- 



117 

main subject to an array of safeguards to prevent abuses, yet al- 
lows significant flexibility in business arrangements. 

Further, the bill contains special provisions to make it easier for 
small local electronic publishers to participate in ioint ventures 
with the RBOC's if they elect to do so. Before I close, quickly I 
would like to make two additional points. 

First, NAA has long believed that competition at the local level 
is the best safeguard, especially over the long term, after the safe- 
guards in this or any bill expire. But, as competition is introduced 
into markets controlled by the RBOC's, it only seems fair to us that 
markets currently foreclosed to the RBOC's also receive a healthy 
dose of competition from the Bells. We recognize that these issues 
are controversial. We are not experts on them. But we respectfully 
urge the committee to work to solutions that will assure passage 
of this bill by the full Senate. 

Finally, we are pleased that the committee has been sensitive to 
the access concerns of small local electronic publishers. Our col- 
leagues at the National Newspaper Association have made a solid 
case to the committee, and we fully support those results. In clos- 
ing, we believe that now is the time for enactment of this legisla- 
tion. We have testified on this before the House. We believe these 
provisions have the endorsement of the White House. And we urge 
passage at the earliest possible time. 

Thank you very much. And I will attempt to answer any ques- 
tions you may have. 

[The prepared statement of Mr. Bennack follows:] 

Prepared Statement of Frank A. Bennack, Jr. 

Mr. Chairman and Members of the Committee, my name is Frank A. Bennack, 
Jr. and I am President and Chief Executive OfTicer of The Hearst Corporation and 
the Immediate Past Chairman of the Newspaper Association of America ("NAA"). 
Thank you for allowing me to appear before you on behalf of the NAA and its mem- 
bers. 

The Newspaper Association of America is a non-profit corporation serving approxi- 
mately 1,225 member newspapers in the United States and Canada. The majority 
of these members are daily ilewspapers that account for more than 85 percent of 
the daily circulation in the United States. In addition, nearly 200 individuals and 
companies allied with the newspaper industry are associate members of NAA. 

I want to thank this Committee and its staff for their efforts to develop legislation 
that will resolve the many troubling issues that have arisen under the AT&T Con- 
sent Decree ("MFJ"), and especially one that the courts have not been able to ad- 
dress properly-namely, the public interest in a sound regulatory framework to gov- 
ern the role of the Bell Operating Companies ("BOCs") in electronic publishing mar- 
kets. I would like to extend our association's special appreciation to Chairman Rol- 
lings, Chairman Inouye and Senator Danforth, whose leadership on this issue has 
been essential to getting where we are today. 

Section 452 of S. 1822 represents a historic compromise between the interests of 
newspapers and those of the Bell companies. The bill recognizes that both of us 
have essential roles to play in bringing exciting new information services to the 
American public. Today I can assure you that this legislation is necessary and in 
the public interest. 

S. 1822 IS needed NOW 

In recent years, developments in the courts and at the FCC have put the public 
interest in diverse and vibrant electronic publishing at risk by eroding the protec- 
tions that previously existed against an ti -competitive conduct by the BOCs. In 1991, 
the FCC scuttled its decades-old structural separation requirements, allowing the 
BOCs to provide information services on an integrated basis, rather than through 
a separate subsidiary. Similarly, the MFJ restriction against BOC entry into infor- 
mation services was removed — albeit reluctantly — by Judge Greene in that same 



118 

year, and the last avenue of appeal was exhausted last fall. These actions elimi- 
nated any effective protection against anti-competitive behavior by the BOCs at a 
time when local exchange competition was still more promise than reality, and when 
the basic shape of the future electronic publishing industry was beginning to take 
shape. 

Even now, in early 1994, the BOCs have not yet entered the electronic publishing 
field in a major way. Congress is still free to set the rules of the road without the 
constraint of major BOC business investment already in place. Thus, now is the 
time to enact S. 1822, before the world of electronic publishing changes too much 
and sound public policy is left behind. 

RECENT MARKET DEVELOPMENTS 

Significant changes have begun to occur in both electronic publishing and local 
telecommunications. The electronic publishing sector is beginning to emerge from its 
infancy. Although far from a mature market, electronic publishing has taken on sig- 
nificant momentum and can be expected to become increasingly important in the re- 
mainder of this decade. 

It is now estimated that close to ten percent of American homes have computers 
equipped with the modems needed to receive electronically published information. 
More and more customers are signing up for these services, and industry is respond- 
ing with ever greater and more diverse service offerings. For example, our own 
member newspapers now provide more than 600 electronic services, including 
audiotext, online services, and facsimile publishing. The rate of growth in end user/ 
consumer services is now the fastest growing market segment. According to industry 
statistics, total sales in that segment rose by approximately 35 percent in 1992, and 
are forecast to continue to grow at a similar annual rate in the near future. And 
overall growth in electronic publishing is expected to continue at a growth rate of 
15 to 20 percent annually for the remainder of this century. All of these develop- 
ments benefit the public by making available a wide and diverse universe of elec- 
tronic information sources. 

This growing and robust electronic publishing market still depends on local tele- 
phone exchange service to connect information providers with their customers. Tele- 
f)hone exchange service is largely still controlled as a monopoly by the franchised 
ocal telephone operating companies, which for most of America means one of the 
BOCs. However, it is now possible to envision the development of significant com- 
petition to the BOCs before this century draws to a close. We hesitate to accept 
claims that competition for the BOCs is already here; it quite simply is not for the 
type of universal local exchange connections that electronic publishers need. But we 
do see competition coming — much faster than once anticipated — in the form of cel- 
lular and PCS radio systems, enhancements to the technology of existing cable com- 
panies, and the installation of facilities by fiber-optic baseoT metropolitan area net- 
works. 

There are still substantial economic and legal barriers to the full growth of these 
competing means of communication, but we fully expect that they can offer service 
that is functionally equivalent to that of the BOCs within the next five to seven 
years, or somewhat sooner if public policy strongly encourages their development. 
For that reason, NAA supports other aspects of S. 1822, which will promote local 
telephone competition and thus create the market conditions that will be needed for 
the electronic publishing industry to fiourish, both in the next few years and afler 
the safeguards outlined in S. 1822 expire. 

PROMOTING THE PUBLIC INTEREST THROUGH A COMPETITIVE FRAMEWORK FOR 

ELECTRONIC PUBLISHING 

When the Bell system was divested, the Bell companies were prohibited by the 
MFJ from providing electronic publishing services. But now. Judge Greene and the 
appellate courts have concluded that the Bell companies cannot be excluded from 
electronic publishing altogether despite the risks of anti-competitive consequences 
that still face us. In effect, the courts have said that Congress must set policy in 
this area, and that other branches of government must protect the public interest 
in a competitive electronic publishing marketplace. 

The BOCs have the ability and the incentive to discriminate against competing 
electronic publishers and to cross-subsidize their own electronic publishing oper- 
ations with telephone monopoly revenues. NAA believes that the record before Con- 
gress already clearly demonstrates that the FCC, the Department of Justice, and 
the state PUCs do not now have the necessary policy guidance to effectively safe- 
guard electronic publishing markets from BOC entry. The Department, under the 
lormer administration, actively encouraged the courts to drop tne information serv- 



119 

ices line of business restriction from the MFJ. In part, the Department placed reli- 
ance on the FCC's safeguards to justiiy abandoning the MFJ prohibition. However, 
as previously noted, the FCC has eliminated its structural separation requirements 
for BOC provision of enhanced services, which include electronic publishing, even 
though the FCC continues to require separate subsidiaries for telephone companies' 
cellular operations. Most state PUCs have not even been able to address the elec- 
tronic publishing issue. A few that have, such as the commissions of New Jersey 
and Pennsylvama, have found that the public interest favors separate subsidiary re- 
quirements similar to those in S. 1822. 

From another perspective, we also recognize the public interest in participation 
by the Bell companies in electronic publishing — with services of their own and in 
ventures with otner publishers — if the risk of monopoly abuse could be eliminated. 
With a view tcwtird achieving an optimum blend of safeguards £md maricet partici- 
pation, NAA entered into a dialogue last year with the Bell companies and Con- 
gress. After prolonged and diflicult negotiations, NAA believes that the majority of 
our concerns have been addressed in tne compromise which is reflected in Section 
452 of S. 1822. It should be understood that while our central concerns were met, 
this was a tough negotiation with some concessions along the way. In a perfect 
world, the bar against the Bells would not have been dropped, or these safeguards 
at least would have been put in place before BOC entry. But, as everyone Knows, 
we don't live in a perfect world. 

The bill requires that the Bell telephone operating companies not engage directly 
in electronic publishing over their monopoly facilities within their service areas. 
However, the BOCs' regional holding companies may provide such services if they 
do so through a separated affiliate. In effect, this restores and strengthens the 
FCC's recently abandoned structural separation requirement and reinforces the re- 
quirements that have been adopted in some states. This separation requirement will 
make it more difficult for the BOCs to engage in discrilination or cross-subsidy and 
much easier for any violations to be detected and corrected. The services that must 
be separated are those which involve the publication of information content — an ac- 
tivity that can efTiciently be carried out without being integrated into network oper- 
ations. The bill carefully avoids imposing a separation requirement on telephone 
company networks services where there may be legitimate claims of efficiency. 

The separated affiliate must be a separate corporation, with separate books and 
separate directors, officers, and employees from the BOC. Moreover, the BOC and 
separated affiUate cannot share property, hiring and training of personnel, purchas- 
ing, installation, and maintenance of equipment, or research and development. 
These requirements are similar to those the FCC now imposes in order to separate 
the BOCs from their cellular aflUiates. 

In addition to requiring structural separation, the bill strengthens existing laws 
against discrimination and cross-subsidy by adding greater specificity and coverage. 
Thus, a BOC would not be allowed to discriminate in favor of its separated affiliate 
in providing facilities, services or information, including customer proprietary net- 
work information (CPNI), billing and collection, or physical collocation. Nor could it 
discriminate in the design, presentation, or provision of telephone company "gate- 
way" facilities that show customers which electronic publishmg services are avail- 
able and provide for connections and billing to such services. 

To preclude cross-subsidy, the bill requires that transactions between the BOC 
and separated affiliate must be at arms-length and that anything of value trans- 
ferred irom the BOC to the separated affiliate must be for consideration at least 
equal to the greater of net book cost or fair market value. These transactional stife- 
guards will provide a much needed additional layer of protection over the accounting 
safeguards now in place. The FCC's current accounting rules only seek to identify 
overall trends of improper allocation of costs between competitive and non-competi- 
tive services. The new transactional rules will prevent abuse in each speciflc case- 
abuse that could be masked in aggregated accounting records that pertain to thou- 
sands or even millions of other, unrelated transactions. 

The bill has several new requirements to aid in the detection of violations and 
in enforcement by private parties or government agencies. Both the BOCs and sepa- 
rated affiliates must keep auditable records and file their contracts with the FCC. 
The separated affiliate must prepare and make public unconsolidated SEC-type fi- 
nancial reports. Very importantly, the BOCs ana separated affiliates must submit 
to an annual compliance review by an independent firm; any exceptions identified 
by this compliance review must be reported to the FCC and made public. In addi- 
tion, private parties will be able to sue the BOC for damages or, for the first time, 
an injunction to stop violations. 

Although the FCC wiU have the power to enforce the safeguards on its own mo- 
tion, and will be obliged to act on any complaints, it is important to note that the 



120 

safeguards are largely self-executing. The FCC will not have to assume undue or 
heavy new burdens; no lengthy rulemakings or additional staff should be needed. 
The bill includes reasonable transition provisions. Existing Bell services and ven- 
tures will not be permanently grandfathered, but will have one year to come into 
compliance with tne new rules. There is no provision for waivers of the safeguards, 
with the attendant uncertainty and cost. However, the safeguards will expire on 
June 30, 2000, an agreed-upon date that we believe is consistent with current esti- 
mates of the development oi local telephone competition. 

PROMOTING MARKET ENTRY 

The electronic publishing provisions of S. 1822 will serve the public interest in 
more ways than merely by establishing safeguards to protect competition from BOC 
abuses. It will also benefit the public by encouraging new market entrants. By cre- 
ating adequate statutory safeguards against BOC abuse, the bill will remove the 
current uncertainty about how the BOCs will behave in this market. At present, we 
believe that many entrepreneurs are still holding back from major investments in 
electronic publishing, concerned in part by the possibility that the BOCs will not 
treat them fairly and could easily drive them out of business. 

S. 1822 will also prove beneficial to the public by increasing investor confidence 
in electronic publisning enterprises. More investment means more competition. 
More competition means better and less costly service to the American public. Serv- 
ices directed to schools, libraries, and hospitals — those who most need information 
but may be least able to pay for it — are more likely to develop without government 
intervention or costly subsidies. 

Moreover, the bill promotes the public interest by permitting fair competition in 
electronic publishing markets by tne Bell companies. Our members welcome this 
competition as we believe that Bell participation under appropriate safeguards has 
the potential to add additional dynamism to the electronic publishing industry. 

Finally, the bill contains very important provisions that will enable the Bell com- 
panies and electronic publishers to elect to work together. We believe that the Bell 
companies' major strengths are, and will remain, in their network services and their 
technical expertise. The bill specifically encourages teaming arrangements between 
BOCs and independent electronic publishers, which will allow each to bring its spe- 
cial strengths to customer services. Additionally, the bill encourages non-exclusive 
joint ventures between the BOCs and electronic publishers. These joint ventures re- 
main subject to an array of safeguards to prevent abuses, yet allow significant flexi- 
bility in business arrangements. It is particularly to be noted that the bill contains 
special provisions to allow small, local electronic publishers to participate in joint 
ventures with BOCs where the BOC can provide substantial equity under FCC su- 
pervision. 

The bill also allows the BOCs to provide inbound telemarketing and referral serv- 
ices to separated affiliates and to other electronic publishers as long as this is done 
on non-discriminatory terms and subiect to FCC oversight. This provision has the 
potential to give all electronic publisners, and particularly smaller ones, access to 
marketing resources that they could not muster on their own. Similarly, it allows 
the BOCs to take advantage of any efficiencies they may have in telemarketing 
through their operating companies, while at the same time assuring that those effi- 
ciencies will be shared with competing publishers. 

All of this increased vigor and competitiveness in the electronic publishing indus- 
try promises greater diversity of services for the American people at lower prices, 
more jobs for American workers, and greater American competitiveness abroad. 

CONCLUSION 

NAA believes that S. 1822 is in the public interest because it allows electronic 
publishers and the Bell Companies to participate in the market on a fair basis. This 
means the public will be able to receive a wide diversity of electronic information 
from many freely competing information providers. In addition, the bill gives the 
BOCs incentives to invest in a modem infrastructure that will bring electronic pub- 
lishing into the 21st century. This bill will also encourage the growth of competitive 
alternatives to the BOCs' current monopolies, thus eventually reducing the need for 
special safeguards. 

Two additional points should also be emphasized: 

First, NAA has long believed that competition at the local level is indeed the best 
safeguard, especially in the longer term and after the separate subsidiary safe- 
guards expire. But as competition is introduced into markets currently controlled by 
the BOCs, it only seems fair to us that markets currently foreclosed to the BOCs 
also receive a healthy injection of competition — this time from the Bells themselves. 



121 

We recognize that these are controversial issues, and we respectfully urge the com- 
mittee to work to solutions that will assure passage of this bill by the mil Senate. 

Finally, NAA is pleased that the committee has included provisions in this biU 
that will assure that small, local electronic publishers have access to Bell-provided 
services at fair rates. The National Newspaper Association — representing thousands 
of community newspapers — have made a solid case to the committee, and we sup- 
port fully this positive result. 

In conclusion, NAA urges Congress to expedite adoption S. 1822 with safeguards 
for electronic publishing that were endorsed by the Administration in the House of 
Representatives. We see the electronic publishing provisions as transitional tools on 
the road to full local competition — which we beUeve is the ultimate safeguard. We 
are confident that passage of this bill will advance the public interest by promoting 
diversity and competition in electronic publishing, expand market opportunities for 
electronic publishers, and bring job growth in businesses where Americans already 
lead the world. 

Thank you for your time and attention. 

The Chairman. Very good. Mr. Lynn. 

STATEMENT OF JOHN B. LYNN, TELECOMMUNICATIONS 

COUNSEL, EDS CORP. 

Mr. LYNN. Mr. Chairman and members of the committee, my 
name is John Lynn. I am chairman of the Telecommunications 
Committee of the Information Technology Association of America, 
commonly known as ITAA. I am also a telecommunications counsel 
in the Office of Grovernment Affairs of EDS Corp. 

On behalf of ITAA, I want to thank the committee for the oppor- 
tunity to participate in today's hearings. I also want to commend 
you, Mr. Chairman, as well as Senators Inouye and Danforth, and 
the other sponsors of S. 1822, for introducing this important legis- 
lative measure. S. 1822 represents a positive and much-needed re- 
sponse to many of the critical issues that are now confronting the 
telecommunications and information services industries. 

In the next few minutes I would like to briefly mention some of 
the provisions of S. 1822 which ITAA believes to be essential and 
which should be retained in any legislation adopted by the commit- 
tee. I would also like to suggest several ways in which S. 1822 
should be strengthened and improved. 

Let me begin by saying that ITAA endorses those provisions of 
the bill which promote the development of effective competition in 
the provision of local exchange services. The U.S. experience in the 
interexchange marketplace demonstrates that competition provides 
users with more choices, new and innovative services, superior 
quality, and lower prices. The advent of effective local exchange 
competition would also have another beneficial consequence. It 
would minimize the BOC's ability to engage in anticompetitive con- 
duct in markets that are dependent on the Bell companies' local ex- 
change facilities. 

Second, ITAA applauds the provisions of the bill which require 
the unbundling of the local exchange network. In addition to pro- 
moting local exchange competition, such unbundling will benefit 
consumers by encouraging the introduction of new, innovative and 
less costly information services. 

Third, we support the nonstructural safeguards of the bill which 
are intended to prevent the Bell companies from cross-subsidizing 
their competitive activities with funds derived from their regulated 
phone operations. These provisions, however, are scattered 
throughout the bill. They are also of uneven length and detail. In 



122 

many cases, these provisions are limited to a specific competitive 
activity. 

ITAA submits that a better approach would be to consolidate 
these provisions, tighten them, and make them applicable to all of 
the BOC's competitive activities. 

Fourth, ITAA supports S. 1822's provisions that prohibit local ex- 
change carriers from misusing customer proprietary network infor- 
mation. Such a safeguard is absolutely essential to ensuring a com- 
petitive information services marketplace and should remain an in- 
tegral part of the bill. 

Fifth, we endorse that portion of S. 1822 which prohibits the 
States from regulating the rates, terms or conditions pursuant to 
which information services are provided to the public, whether of- 
fered by carriers or noncarriers. This limited preemption is nec- 
essary to prevent public utility regulation from choking the now vi- 
brant information services marketplace. 

As should be evident from my testimony, there are many provi- 
sions of S. 1822 which ITAA finds highly desirable, and we enthu- 
siastically endorse. S. 1822, however, does have one major short- 
coming that must be corrected. That is the distinction which the 
bill draws between electronic publishing and other information 
services. For no discemable public policy reason, the bill requires 
the Bell companies to provide electronic publishing but not other 
information services through the safeguard of a separate, arm's- 
length affiliate. 

All information services, however, are equally dependent upon 
the BOC's local exchange bottleneck. All information services are 
therefore equally vulnerable to anticompetitive abuse. There is sim- 
ply no sound public policy rationale for the bill's separate subsidi- 
ary requirement to be limited to electronic publishing services, 
which comprise less than 20 percent of the total information serv- 
ices marketplace. 

Efficiency-enhancing information services of every kind are criti- 
cal to maintaining the productivity and competitiveness of U.S. in- 
dustry in today's increasingly global economy. The committee 
should, therefore, amend S. 1822 so as to require the Bell compa- 
nies to provide all information services through fully separate affili- 
ates. 

Such a requirement will not disadvantage the BOC's. After all, 
the rest of the U.S. information services industry, which is today 
the world's acknowledged leader, has achieved its preeminent posi- 
tion by dealing with the regulated network on a fully separate 
arm's-length basis. Neither the industry nor the American public 
has suffered as a result. 

In closing, once again, I want to thank the committee for the op- 
portunity to participate in today's hearings, and to present ITAA's 
concerns about the very important issues confronting the informa- 
tion services industry. 

I also request the opportunity to submit written amendments 
which implement the suggestions I have discussed today. 

Thank you. 

[The prepared statement of Mr. Lynn follows:] 



123 

Prepared Statement of John B. Lynn 

My name is John B. Lynn. I am Chairman of the Telecommunications Conmiittee 
of the Information Technology Association of America or, as it is more commonly 
known, "ITAA." I am also Telecommunications Counsel in the Office of Government 
Affairs of EDS Corporation. 

On behalf of ITAA, I want to thank the Committee for the opportunity to partici- 
pate in today's hearings. ITAA, as you may know, is the principal trade association 
of the computer software and services industry. Our member companies provide the 
public with a rich variety of information services, including software design and 
support, systems mtegration, facilities management, and network -based information 
sendees. The information services provided by ITAA's member companies are used 
by business, government and residential consumers. They include such diverse offer- 
ings as cash management, credit card authorization, computer-aided design and 
manufacturing, database retrieval, electronic mail, electronic data interchange, elec- 
tronic publishing, gateways, information management, transaction processing, 
value-added network services, and other remote access data processing services. 

ITAA commends you, Mr. Chairman, as well as Senators Inouye and Danforth 
and the other sponsors of S. 1822, for introducing this important legislative meas- 
ure. S. 1822 represents a positive and much-needed response to many of the critical 
issues that are now confronting the telecommunications and information services in- 
dustries. First and perhaps foremost, S. 1822 will promote the development of facili- 
ties-based competition in the local exchange marketplace. The bill will also hasten 
the arrival of the National Information Infrastructure ("Nil") by mandating the 
unbundling of, and nondiscriminatory access to, the local exchange network, m ad- 
dition, the bill wisely recognizes the need for structural and nonstructural safe- 
guards to accompany the entry of the Bell Operating Companies ("Bell Companies" 
or "BOCs") into competitive markets. Finally, the bill will promote the continued vi- 
tality and growth of the information services industry by preempting unnecessary 
State public utility regulation. 

Notwithstanding these very important strengths, the bill has one major short- 
coming which should be remedied before S. 1822 is enacted into law. Specifically, 
S. 1822 should be amended so as to require the Bell Companies to provide all infor- 
mation services, not just a relatively small subset, through fiiUy separate, arm's- 
length affiliates. 

In the next few minutes, I would like to discuss each of these points in turn. I 
would also like to suggest ways in which S. 1822 can and should oe strengthened 
and improved. 

I. LOCAL EXCHANGE COMPETITION 

ITAA wholeheartedly supports those provisions of S. 1822 which promote the de- 
velopment of effective comf)etition in the provision of local exchange services. The 
United States' experience in the interexchange marketplace demonstrates that com- 
petition provides users with more choices, new and innovative services, superior 
quality, and lower prices. There are no reasons why that experience cannot be suc- 
cessfully replicated in the local exchange marketplace. In addition to producing 
consumer benefits in the provision of telecommunications services, the advent of ef- 
fective local exchange competition will have another salutary consequence. More 
specifically, it will minimize the Bell Companies' ability to engage in anticompetitive 
conduct in markets that are dependent on the BOCs' local exchange facilities, there- 
by encouraging greater competition and increased consumer benefits in these adja- 
cent markets. 

ITAA therefore endorses those provisions of S. 1822 which promote local exchange 
competition by removing entry barriers, preempting inconsistent State regulation, 
encouraging the entry of new market participants, requiring nondiscriminatory 
interconnection to the local exchange, ana mandating number portability. Taken to- 
gether, these measures will encourage the development of competitive alternatives 
to the BOCs and other local exchange carriers. 

II. NETWORK UNBUNDLING 

ITAA also applauds the provisions of S. 1822 which require the unbundling of the 
local exchange network. In addition to promoting local exchange competition, 
unbundling will benefit consumers by encouraging the introduction of new, innova- 
tive and less costly information services. In particular, information service providers 
will benefit from the ability to make more cost-effective use of the existing tele- 
communications infrastructure, using only those network components which they 
want and need. Such flexibility will also permit information service providers to 



124 



take advantage of the technology already embedded in the carriers' networks, there- 
by enabling them to develop new and innovative service ofTerings and to deliver 
these services at lower cost. 

S. 1822'8 unbundling and interconnection provisions will therefore effectively ad- 
dress the princioal shortcoming of the FCC's justifiably-maligned Open Network 
Architecture ( ONA ) regime. Under ONA, the Bell Companies have been required 
to do little more than repackage and rename their existing service offerings In 
short, ONA has been a regulatory failure. Although the FCC has attempted to open 
local transport to a certain degree of competition, the Bell Companies' networks re- 
mam fundamentally closed, at least insofar as independent information service pro- 
viders are concerned. S. 1822 will go a long way in correcting these deficiencies 

It IS by no means certain, however, how the FCC will respond to the unbundling 
and interconnection provisions of S. 1822. In order to ensure that there are no mis- 
understandings, the Congress should make it abundantly clear to the FCC that 
ONA has not worked and that the FCC is being directed to require real network 
unbundling, specifically with reference to the needs of information service providers 
In this regard, the Congress should also make clear that the FCC's ONA pricing 
rules— which actually discourage the use of advances in network technology— are 

fu x*T??^!^u feJ]fT^-,^/J^^,^°"^^^^ '^«"t« ^ ensure that there will be traffic on 
the Nil, the I-CC should be directed to abandon its ill-advised ONA pricing policies 
and require the introduction of cost-based local access arrangements that satisfy the 
technical and operational needs of information service providers, while maintaining 
the continued availability of other telecommunications services that may be of value 
in providing information services. 

III. NONSTRUCTURAL SAFEGUARDS 

*u^; 1822 prescribes a number of important nonstructural safeguards to help ensure 
that the Bell Companies' entry into competitive markets does not result in anti- 
competitive abuse. Two of these safeguards are of particular interest to ITAA- those 
deahng with the prevention of cross-subsidies and those governing the use of cus- 
tomer proprietary network information or "CPNI." 

Scattered throughout the bill are a series of provisions that prohibit, or direct the 
t LC to prescribe rules that prevent, the cross-subsidization of the Bell Companies' 
competitive activities by their local exchange operations. In many cases, these provi- 
sions are limited to proscribing the cross-subsidization of a certain specified com- 
petitive activity. ITAA submits that a better approach would be to consolidate these 
provisions and make them applicable to all of the BOCs' competitive activities. If 
S. 1822's goals are to protect ratepayers and promote competition, there is no dis- 
cermble reason why different rules should apply to different Bell Company activi- 
ties. '^ •' 

Once consolidated, these rules should provide the FCC with concrete guidance in 
a number of respects. First, the FCC should be directed to convene a Federal-State 
Jomt Board to establish uniform state and federal cost assignment and allocation 
regulations and manuals. The regulations adopted by the Joint Board should ensure 
that joint and common costs are allocated to competitive services in a way that does 
not increase the rates for telephone exchange service. Such a measure is necessary 
because approximately two-thirds of the BOCs' costs and revenues are subject to the 
jurisdiction of the States and are thus beyond the reach of the FCC. 

Second, the FCC should be directed to prescribe regulations which ensure that 
ratepayers are insulated from the economic risks associated with the Bell Compa- 
nies competitive operations. Third, as a further safeguard against improper cost- 
shittmg, the I<CC should be required to prescribe regulations governing the transfer 
of assets between a Bell Company and its competitive operations. A statutory pre- 
scription of such regulations is necessary given Bell Company statements that the 
1" LL s current rules- which require assets transferred to a Bell Company from its 
competitive operations to be valued at the lesser of net book cost or fair maricet 
value, and assets transferred from a Bell Company to its competitive operations to 
be valued at the greater of net book cost or fair market value— should be revised, 
l-inally, the FCC should be authorized to make sure that ratepayers benefit from 
anyintangible Bell Company assets used by the BOCs' competitive operations. 

Ihe second nonstructural safeguard prescribed by S. 1822 that is of interest to 
llAA prohibits local exchange carriers from misusing CPNI. This safeguard is abso- 
lutely essential and should remain an integral part of S. 1822. UnlUce the CPNI 
rules adopted by the FCC, S. 1822 creates a level playing field and places local ex- 
change earners and their competitors on an equal footing. S. 1822 also ensures that 
the earners do not engage in a number of subtle, but nonetheless harmful, kinds 
ol discnmmation in providing access to aggregate (i.e., aggregated, non-specific in- 



125 

formation about customers and usage) CPNI, by requiring the carriers to make such 
CPNI available to third parties on reasonable terms and conditions. In addition, the 
bill's CPNI provisions wisely require the carriers to advise the FCC as to the avail- 
ability of aggregate CPNI. Absent such a requirement, it would be difficult for unaf- 
filiated information service providers to obtain access to valuable and otherwise 
available information. 

rv. PREEMPTION OF STATE REGULATION 

ITAA also endorses the provision of S. 1822 which orohibits the States from regu- 
lating the rates, terms or conditions pursuant to which information services are pro- 
vided to the public, whether offered by carriers or non-carriers. As a result of the 
uncertainty created by the U.S. Court of Appeals for the Ninth Circuit in the appeal 
of the FCC's Computer III decision, a number of States have asserted iurisdiction 
over previously unregulated information services. Among other things, these States 
have claimed the authority Lo impose entry, exit and rate regulation on the provi- 
sion of information services. If the States continue on their present course, they will 
have a debilitating effect on the now vibrant information services marketplace. 

No matter how well-intentioned, public utility regulation will inevitably — and ad- 
versely — skew the fanctioning of the information services marketplace. Entry regu- 
lation will invariably delay the introduction of new services. In this regard, the 
Committee should be aware that hundreds of new information services and service 
providers enter the market every year. A reauirement that each of these new serv- 
ices and service providers obtain prior regulatory approval will deny users timely 
access to these new services and sources of supply. It will also encourage competi- 
tors to use the regulatory process, rather than the marketplace, to battle their com- 
petitors. 

Rate regulation will similarly harm consumers. It will all but eliminate the vigor- 
ous price competition which now characterizes the marketplace and works to the ad- 
vantage of consumers. Rate regulation, by definition, means published prices. Pub- 
lished prices encourage price rigidity. Combined with the delays inherent in the reg- 
ulatory process, rate regulation will eliminate the pricing flexibility that now pre- 
vails in the marketplace. Consumers plainly will not benefit from such an environ- 
ment. These problems will persist even if rate regulation is limited — as some States 
have proposed — to the BOCs. The published rates, terms and condition for the 
BOCs information services would soon serve as the lowest common denominator 
against which competitors measure all of their offerings. 

S. 1822 will remove these threats to the continued economic vitality and growth 
of the information services industry. 

V. STRUCTURAL SAFEGUARDS 

In Section 2 of S. 1822, Congress finds that "safeguards are necessary to ensure 
that the Bell operating companies do not abuse their market power over local tele- 
phone service to discriminate against comjaetitors in the markets for electronic pub- 
lishing, alarm, and other information services." Notwithstanding this unambiguous 
finding, the operative provisions of S. 1822 draw an unwarranted and unworkable 
distinction between "electronic publishing" and other information services. Specifi- 
cally, the bill requires the Bell Companies to provide "electronic publishing" — but 
not other information services — through separate arm's-length affiliates. Indeed, the 
bill also requires the Bell Companies to engage in manufacturing and provide 
interLATA services through separate subsidiaries. ITAA is at a loss to understand 
why this requirement does not also apply to information services as a whole. 

As the Department of Commerce has repeatedly found, information services rep- 
resent an important and growing share of the Nation's GDP. Perhaps more impor- 
tant, information services have become "a strategic input" critical to the inter- 
national competitiveness of U.S. industry and the efficiency of state and federal gov- 
ernments. "Electronic publishing" services, as defined by S. 1822, comprise less than 
twenty percent of the domestic information services marketplace. Other network- 
based information services, by contrast, such as transaction processing, electronic 
mail, electronic data interchange, remote access data processing and valueadded 
services, account for the bulk of the industry. 

S. 1822, however, does not reflect these marketplace realities. Rather, the bill 
inexplicably reauires the Bell Companies to provide only a small subset of informa- 
tion services — electronic publishing" — throu^ separate subsidiaries. Although ad- 
mittedly a step in the right direction, there are no sound public policy reasons why 
the bill's separate subsidiary requirement should be limited to "electronic publish- 
ing." All information services are equally dependent upon the BOCs' local exchange 
bottleneck and therefore all are equally vulnerable to anticompetitive abuse on the 



126 

part of the Bell Companies. In this regard, there is no cognizable difTerence between 
electronic publishing" — whatever the parameters of that category of service are ul- 
timately determined to be — and other information services. Nor is there any rational 
basis for asserting that some information services are more societally important 
(and thus deserving of safeguards) than others. EfTiciency-enhancing information 
services of every kind are critical to maintaining the productivity and competitive- 
ness of U.S. industry in today's increasingly global economy. 

Moreover, to single out a newly defined subset of information services for special 
treatment would create many needless problems. Because "electronic publishing" is 
not an accepted statistical, industry, or regulatory classification, S. 1822's reliance 
on that term would engender numerous disputes over the classification of individual 
Bell Company offerings. Similarly, the bill would create perverse incentives on the 
part of the BOCs to structure their offerings — without regard to efficiency or tech- 
nology — so as to fall outside the definition of "electronic publishing" and avoid the 
separate subsidiary requirement. 

The Committee should therefore amend S. 1822 so as to require all Bell Company 
information services to be provided through separate subsidiaries. This can be ac- 
complished in one of two ways. First, S. 1822 can be amended to extend the struc- 
tural separation requirements which now apply to the BOCs' "electronic publishing" 
services to all of the Bell Companies' information services. Alternatively, S. 1822 
can be revised so as to require the BOCs to provide all information services other 
than "electronic publishing" through the separate subsidiary required for interLATA 
services. 

If the latter course is chosen, the interLATA separate subsidiary should be 
strengthened to make it more effective in preventing anticompetitive abuse. In par- 
ticular, the provisions of the bill which describe the interLATA subsidiary should 
be revised so as to: (i) prohibit the sharing and common ownership of property and 
facilities; (ii) prohibit common or shared officers and employees; (iii) require the sub- 
sidiary to obtain transmission capacity from affiliated telephone companies solely 
pursuant to generally available tariffs; (iv) require all transactions between parent 
and affiliate to be conducted on an arm's-length basis pursuant to written contracts 
filed with the FCC; (v) require inter-affiliate transactions to reflect fair market 
value; (vi) prohibit joint activities of any kind except to the extent specifically au- 
thorized; (vii) require the subsidiary to carry out all of its own contmiercial activities; 
(viii) require at least ten percent outside ownership; and (ix) require the subsidiary 
to prepare and file financial statements and reports as if it were a publicly -held cor- 
poration. 

A requirement that all information services be provided through such a subsidiary 
plainly will not disadvantage the BOCs. After all, the rest of the U.S. information 
services industry — which is today the world's acknowledged leader — has achieved its 
preeminent position by dealing with the regulated network on a fully separate 
arm's-length basis. Neither the industry nor the American public has suffered as a 
result. Indeed, both have benefited from the marketplace incentives which such sep- 
aration creates to make the most efficient use of regulated communications services 
and thereby minimize costs. 

If the Subcommittee is concerned that applying a separate subsidiary requirement 
to all of the Bell Companies' information services would disrupt too many existing 
services (a concern which applies equally to "electronic publishing"), it would be 
preferable to grandfather those of the BOCs' information services that were being 
offered as of the date S. 1822 was introduced. Similarly, if the Subcommittee is con- 
cerned about any claimed efficiencies that might be lost as a result of structural sep- 
aration, the better course would be to prescribe a procedure and criteria pursuant 
to which a Bell Company could seek a waiver of the separate subsidiary require- 
ment for a given information service. Neither concern, however, warrants limiting 
the separate subsidiary requirement to "electronic publishing." 

S. 1822 should therefore be amended so as to require the Bell Companies to pro- 
vide all information services through fully separate subsidiaries. With this change, 
ITAA is prepared to support the Committee's efforts to enact this important legisla- 
tion. 

In closing, I once again want to thank the Committee for the opportunity to par- 
ticipate in today's hearings, and to present ITAA's concerns about the very impor- 
tant issues confronting the information services industry. 

The Chairman. We would be delighted to receive those amend- 
ments, Mr. Lynn. 
Mr. Carter. 



127 

STATEMENT OF DAVID CARTER, PRESmENT, CENTRAL 
STATION ALARM ASSOCIATION 

Mr, Carter. Good morning. My name is Dave Carter. I own and 
operate National Security Service, a small business alarm company 
located in Raleigh, NC. I also serve as both president of the 
Central Station Alarm Association and treasurer of the National 
Burglar and Fire Alarm Association. 

Just last week, more than 200 alarm professionals from 31 
States came to Washington for the fourth time in 3 years. Once 
again, we came to urge Congress to enact legislation ensuring that 
the highly competitive alarm industry can continue to thrive. We 
were thrilled to be here in support of both House and Senate bills 
which will allow us to continue to provide the high-quality alarm 
services which protect the life, safety, and property of your con- 
stituents. 

I appreciate the opportunity to testify, and recognize the leader- 
ship and support of Chairmen Rollings and Inouye, Senator Dan- 
forth, and the rest of the committee. 

We believe you are facing n historic crossroad. Key actors in Con- 
gress, the administration and a large cross-section of the tele- 
communications industry agree that it is time to resolve longstand- 
ing conflicts and establish the rules for the future. We have consist- 
ently testified in both the House and Senate that Congress and not 
the courts should establish telecommunications policy. Our indus- 
try looks forward to working closely with you toward the enactment 
of'^S. 1822 this year. 

There are more than 13,000 alarm companies in this country, 
nearly all of which are r.mall businesses. During the past two dec- 
ades, our industry's employment has tripled to approximately 
130,000 employees, serving more than 17 million customers. Yet, 
the average alarm company has less than 10 employees. The top 
100 alarm companies control less than 25 percent of a $10 billion 
business. And the 100th largest alarm company has revenues less 
than $3 million. 

For more than a century and a half, the world has come to the 
U.S. alarm industry to learn how to electronically protect their 
homes and businesses. S. 1822 will allow us to maintain our inter- 
national dominance for at least the next decade, if not longer. 

However, as small businesses, we have always been concerned 
about the need for adequate entry tests and procedural safeguards 
should the Bells be allowed to provide alarm monitoring services. 
We believe S. 1822 provides those protections. 

S. 1822 establishes a 5V2-year waiting period before the Bells can 
apply for entry into alarm monitoring services. But in no cir- 
cumstances would the Bells be permitted to offer alarm monitoring 
services before 6 years from the date of enactment. This waiting 
period is critical. It allows time to establish a clear record as to 
whether the FCC can adequately administer its new responsibil- 
ities under the Cable Act, as well as the manufacturing and long- 
distance provisions of S. 1822. 

We have repeatedly expressed our concerns about telephone com- 
pany entry into alarm monitoring services in the face of an under- 
funded and understaffed FCC. Most alarm companies maintain lit- 
tle or no cash reserves. So, if the Commission cannot promptly ad- 



128 

judicata complaints, hundreds of companies will be driven out of 
business, and thousands will lose their jobs. 

Why risk destroying a thriving industry when a waiting period 
will establish if the FCC has the ability to act in a timely fashion? 

Once the waiting period expires, the Bells would have to apply 
to the FCC and meet two entry tests. First, the Department of Jus- 
tice would have to determine if an antitrust test is met. The alarm 
industry believes the Department of Justice's experience in anti- 
trust law establishes it as the appropriate agency to make this de- 
termination. 

Next, the FCC would have to certify not only that a public inter- 
est test is met, but also that it could promptly administer any laws 
and regulations applicable to the alarm industry. 

In addition, the FCC would have to issue regulations within 6 
years of enactment, and prior to Bell entry, which would prohibit 
access to our customer lists. It would also require that a cease-and- 
desist order be issued within 60 days of the filing of a legitimate 
complaint, and a final determination be made within 120 days. 

These two provisions address core concerns of our industry: tar- 
get marketing of our existing customers and an expedited com- 
plaint process. 

Finally, a number of noncontroversial technical changes which 
have been fully reviewed need to be made to S. 1822. These modi- 
fications include: One, a clarification should be made that any Bell 
company engaging in alarm monitoring services between now and 
the date of enactment would have to cease such activity upon en- 
actment. 

Two, section 232(c) should clarify that Bell entry into the alarm 
monitoring services shall not occur until the FCC finds it has the 
capacity to quickly and effectively enforce any laws and regulations 
that pertain to the alarm industry. 

Three, the portion of section 232(d), which refers to the compila- 
tion of customer lists, needs to be redrafted as a separate sub- 
section to clarify that, (a) the Bells are prohibited from using any 
customers lists that they have developed prior to the date of enact- 
ment, and, (6) the Bells are permanently prohibited from develop- 
ing alarm customers lists after the date of enactment. 

Additionally, any regulations necessary to carry out this provi- 
sion must be issued within 60 days of the date of enactment, not 
6 years as currently stated in the bill. 

Four, in section 232(g) the words "telecommunications facilities 
of the Bell telephone companies or any affiliate in which it has an 
equity interest," should be substituted for "telephone exchange 
service facilities." The Bells should be prohibited from using all 
means of telephone transmission, not just exchange services. 

Five, in section 232(g), the words "customers or persons," needs 
to be added to the list of people notified of a threat to a premises. 
We often alert customers directly of an emergency. 

Six, section 232(g) defines an affiliate as more than 50 percent 
ownership. It was understood that neither the Bells, nor their af- 
filiates, could provide alarm services. Language which prohibits the 
Bells and any affiliate in which they have an equity interest from 
providing alarm monitoring services needs to be added. 



129 

On behalf of the alarm industry, I thank the committee for the 
consideration it has shown us, and wish to commend the chairman 
for his longstanding leadership. I must tell you we have been pleas- 
antly surprised that Congress has been so responsive to our indus- 
try. For many of us, this experience has restored our faith that the 
democratic process still works. 

Once again, we look forward to working with you in successfully 
enacting legislation this year which not only addresses our con- 
cerns, but which also helps to ensure that America remains the 
world's leader in telecommunications. 

Thank you. 

[The prepared statement of Mr. Carter follows:] 

Prepared Statement of David Carter 

Good morning, my name is David Carter. I own and operate National Security 
Service, a small-business alarm company in Raleigh, North Carolina. I also serve 
as both President of the Central Station Alarm Association and Treasurer of the Na- 
tional Burglar and Fire Alarm Association. 

Just last week more than 200 alarm professionals from 31 states came to Wash- 
ington for the fourth time in three years. Once again we came to urge Congress to 
enact legislation ensuring that the highly-competitive alarm industry can continue 
to thrive. We were thrilled to be here in support of both House and Senate bills that 
will allow them to continue providing the high-quality alarm services which protect 
the life, safety and property of your constituents. 

I appreciate this opportunity to testify on behalf of the alarm industry, and recog- 
nize the leadership and support of Chairmen HoUings and Inouye, Senator Dan- 
forth, and the rest of the Committee. We believe you are currently facing an historic 
crossroad. For the first time, key actors in Congress, the Administration and a large 
cross-section of the telecommunications industry agree that it's time to resolve long- 
standing conflicts and establish the rules for the future. We have consistently testi- 
fied in both the House and Senate that Congress, and not the courts, should estab- 
lish telecommunications policy. Our industry looks forward to working closely with 
you toward the enactment of S. 1822 this year, and encourages the Committee to 
consider the bill as soon as possible to ensure that this opportunity does not pass 
by. 

There are more than 13,000 alarm companies in this country, nearly all of which 
are small businesses. They employ approximately 130,000 workers, and service 17 
million customers, yet the average alarm company has fewer than 10 employees. 
And during the past two decades, industry employment has tripled. The top 100 
alarm companies control less than 25 percent of a $10 billion market, and the lOOth 
largest alarm company grosses less than $3 million a year. Our highly competitive 
industry serves virtually every community in the nation, and pre-dates the tele- 
phone industry by more than 40 years. We often note that Alexander Graham Bell 
made his first long distance call over borrowed burglar and fire alarm wires. 

For more than a century and a half the world has come to the United States 
Alarm Industry to learn how to electronically protect their homes and businesses. 
S. 1822 will allow us to maintain our international dominance for at least the next 
decade, if not longer. However, as small companies, we have always been concerned 
about the need for adequate entry tests and procedural safeguards should the Bells 
be allowed to provide alarm monitoring services. We believe S. 1822 provides those 
protections. 

S. 1822 establishes a five and one-half year waiting period before the Bells can 
apply for entry into alarm monitoring services. But, under no circumstances would 
the Bells be permitted to offer alarm monitoring services before six years from the 
date of enactment. This waiting period is critical. It allows time to establish a clear 
record as to whether the Federal Communications Commission (FCC) can ade- 
quately administer its new responsibilities under the cable act, as well as under the 
manufacturing and long distance portions of S. 1822. 

We have repeatedly expressed to this Committee our concerns about telephone 
company entry into alarm monitoring services in the face of an underfunded and 
under-staffed FCC. Most small alarm companies maintain little or no cash reserves, 
so if the Commission cannot promptly adjudicate legitimate complaints, hundreds 
of companies will be driven out of business, and thousands will lose their jobs. Why 



130 

risk destroying a thriving industry when a waiting period will establish if the FCC 
has the ability to act in a timely fashion? 

Once the waiting period expires, the Bells would have to apply to the FCC and 
meet two entry tests. First, the Department of Justice would nave to determine if 
the Modified Final Judgement's 8(c) antitrust test is met. It requires a determina- 
tion "* * * that there is no substantial possibility that such company or its affiliates 
could use monopoly power to impede competition in the market such company seeks 
to enter." The alarm industry believes the DOJ's experience in antitrust law estab- 
lishes it as the appropriate agency to make this decision. Next, the FCC would have 
to certify not only that a public interest test is met, but also that it could promptly 
administer any laws and regulations applicable to the alarm industry. 

In addition, the FCC would have to issue regulations within six years of enact- 
ment, but prior to Bell entry, which would prohibit Bell access to our customer lists. 
We have indicated that access to these lists is a core concern because such knowl- 
edge would provide a means for target marketing our existing customers. 

Finallv, should alarm companies identify unfair competitive activities, S. 1822 re- 
quires that the FCC issue a cease and desist within 60 days of the filing of a legiti- 
mate complaint being filed provided "an appropriate showing that the alleged viola- 
tion occurred." A final determination on a complaint would nave to be made within 
120 days. This expedited complaint process would help ensure that alarm companies 
do not win their cases after they've already lost their businesses. 

Finally, a number of non-controversial, technical changes which have been fully 
reviewed need to be made to S. 1822. These modifications include: 

1. A clarification should be made that any Bell Company engaging in alarm mon- 
itoring services between now and the date of enactment would have to cease such 
activity upon enactment. 

2. Section 232(cX2) should clarify that Bell entry into the alarm monitoring serv- 
ices shall not occur until the FCC finds it has the capacity to quickly and effectively 
enforce any laws and regulations that pertain to the alarm industry. 

3. The portion of Section 232(dX2) which refers to the compilation of customer 
lists needs to be redrafted as a separate subsection to clarify that: 

(a) the Bells are prohibited from using any customer lists that they may have 
developed prior to tne date of enactment, and 

(b) the Bells are permanently prohibited from developing alarm customer 
lists afler the date of enactment. 

Additionally, any regulations necessary to carry out this provision must be issued 
within 60 days of the date of enactment, not six years, as currently stated in the 
biU. 

4. In Section 232(gXlXA), the words "telecommunications facilities of the Bell 
Telephone Companies or any affiliate in which it has an equity interest" should be 
substituted for telephone exchange service facilities." The Bells should be prohib- 
ited from using all means of telephone transmission, not just exchange services. 

5. In Section 232(gXlXA), the words "customers or persons" need to be added to 
the list of people notified of a threat to the premises. We often alert customers di- 
rectly of an emergency. 

6. Section 232(gX3) defines an affiliate as more than 50 percent ownership. It was 
understood that neither the Bells nor their affiliates could provide alarm services. 
Language which prohibits the Bells and any affiliate in which they have an equity 
interest from providing alarm monitoring services needs to be added. 

On behalf of the alarm industry, I thank the Committee for the consideration it 
has shown us and wish to commend the Chairman for his long-standing leadership. 
I must tell you we have been pleasantly surprised that Congress has been so re- 
sponsive to our industry. For many of us, this experience restored our faith that the 
democratic process still works. Once again, we look forward to working with you to- 
ward successfully enacting legislation this year which not only addresses our con- 
cerns, but which also helps to ensure that America remains the world's leader in 
telecommunications. 

The Chairman. Thank you, Mr. Carter. Mr. Fishman. 

STATEMENT OF R. JACK FISHMAN, PRESmENT, LAKEWAY 

PUBLISHERS, INC. 

Mr. FiSHMAN. Thank you, Mr. Chairman. I will try to be as brief 
as I possibly can. My name is R. Jack Fishman, and I am here to 
speak for the more than 4,000 daily and nondailv small community 
newspapers that make up the membership of the National News- 



131 

paper Association. I publish one daily and six small dailies in Ten- 
nessee. NW flagship newspaper is the Daily Citizen Tribune of Mor- 
ristown, TN. It is in a county of about 55,000 people, and I am 
proud to claim a circulation of about 21,000. 

Second, on behalf of the National Newspaper Association I would 
like to applaud the ground-breaking efforts of the members of this 
committee who worked with us so diligently, Mr. Burns, Mr. 
Inouye, Mr. Danforth, and you Mr. Chairman, in crafting fair and 
competitive public policy in S. 1822. 

Third, I would like to quickly comment on the electronic publish- 
ing safeguards reflected in the bill. We would like to again associ- 
ate ourselves with Mr. Bennack and the Newspaper Association of 
America for their testimony. They have worked to establish those 
safeguards and we support them. 

Unfortunately, the thousands of small newspapers that I rep- 
resent, however, will not have an opportunity to benefit from those 
safeguards if they cannot gain access to the information super- 
highway in the first place. That is why I am here today, to talk 
about how important it is that Congress realize that, as you have 
done in S. 1822, the importance of localism to a small community 
newspaper. These provisions will ensure that regulators will make 
decisions that reflect the economic differences between national or 
regional electronic publishers and those who provide news and in- 
formation in the local communities. 

Fourth, I would like to boast of our small community news- 
papers. We think have a unique function and one that sometimes 
the larger metropolitan papers simply cannot perform. Let me give 
you a very quick example of a few weeks ago when we had the roll- 
ing blackout, with a possibility of cutting off power in various sec- 
tions of the community. That happened in tnis area, and it was 
also going to happen in our area, in our small town. 

The power manager called me and asked — or informed me — that 
that was going to happen. And I said: "How are you going to inform 
the industries and the businesses to shut down their computers, or 
is it just going to be you pull the plug and they crash?" And he 
said, "Well, they were going to try to do it by broadcast media, that 
type of thing." 

And I said well, suppose they do not have broadcast media? Sup- 
pose they do not have radios? And he said well, there is nothing 
really that they could do. But with the audiotext system that we — 
and we are in a very, very small community — but we have put into 
effect an audiotext system at our newspaper, so anybody in the 
community could call the newspaper and dial up our audiotext sys- 
tem and know on just a telephone call exactly what was going to 
happen to their computers and their machinery and their employ- 
ees and their staffs. 

We think this is a very important thing. Fortunately, we did not 
have to use it. Hey, we might have to use it again today if it con- 
tinues to snow, but we did not then. That was a win-win situation 
for everybody that they could be informed. 

This brings me to my fifth point, and this will not surprise any 
of you that have been in business. Sooner or later we all have to 
bring in a little revenue to pay for whatever service that we are 
providing, audiotext or whatever it may be. One of the best, and 



132 

it seems to be most reliable, ways to do that might be in the Nil 
numbers. 

Nil numbers, which can be allocated on a local exchange basis, 
allow the newspaper reader the convenience of rapidly and easily 
dialing up the audiotext service without having to keep track of a 
telephone number. It also offers me the convenience of having the 
phone company doing the billing and collecting for the information 
service. It is ideal for all concerned, or it could be if it were not 
for the fact that at the present time the information superhighway 
is dominated by the huge corporations and the little guys can eas- 
ily get stepped on. That is why localism is so very important to us 
all. 

Just last Friday I was in South Carolina and had the opportunity 
to speak with the South Carolina Press Association and the weekly 
newspapers in South Carolina. And their question was at that par- 
ticular time, "What should we do?" Is the Senate and the Congress 
going to act in order that we will know which direction we should 
move? 

The short answer is that we felt sure that Congress would act 
this year. Insofar as they act and what parameters they set, let me 
kind of give you an example as to why it is important that you do 
act. I am not sure what a reader in Atlanta pays to dial up their 
audiotext system. I think it is 35 or 50 cents a call. But the same 
tariffs that basically have been proposed in Tennessee would have 
required in essence that that call to my readers be $3 because it 
is a very small area. 

We are not asking the committee to solve the tariff problem. Nil 
members are only a tiny part — the numbers are only a tiny part 
of the electronic future for newspapers. I am simply saying this is 
what can happen to the little guy and he can be forced off the infor- 
mation highway unless Congress steps in to redress this balance. 

My sixth point, is that the scene is now dominated by the Bell 
companies, the cable companies, Paramount, Viacom, you know all 
of these big names better than I do. But let us face it, none of those 
guys are little small information providers. That is why we need 
guaranteed access to the same information highway that we will all 
be on with fair and reasonable rates. We support the provisions of 
S. 1822 that attempt to do just that. 

Let me say in conclusion, Mr. Chairman, that small community 
newspapers want to build the side roads to the information super- 
highway but they cannot even get started if they are blocked from 
access. It is not a conspiracy. The big conglomerates are not out 
there to squash us. We do not believe that. It is simply the fact 
that their priorities are to make profits for their stockholders, and 
we do not object to that. And sometimes they overlook the small 
information provider. 

What that means is that they do not have the time to calculate 
or accommodate the impact of tneir actions on small electronic pub- 
lishers unless Congress will step in. That is why I am here to ask 
the members of this committee to support S. 1822 and the localism 
provisions within so that small community newspapers do not end 
up as road kill on the information highway. 

Thank you for giving me this opportunity. 

[The prepared statement of Mr. Fishman follows:] 



133 

Prepared Statement of R. Jack Fishman 

Mr. Chairman and members of the committee: My name is R. Jack Fishman. I 
publish one daily and six non-daily newspapers in Tennessee. My flagship news- 
paper, the daily Citizen-Tribune of Morristown, serves a county of about 55,000 peo- 
ple with a circulation of 21,000. 

I speak here today on behalf of the more than 4,200 daily and non-daily news- 
papers that compose the National Newspaper Association. 

I bring two simple messages today. 

First, we applaud the ground-breaking efforts of the members of this committee 
in crafting fair and competitive public policy that will shape this country's informa- 
tion superhighways. It is time for Congress to reclaim its leadership role in tele- 
communications. In order for a diverse and vibrant local media market to thrive, 
universal service is essential and with it must come safeguards to protect those who 
compete with the owners of the local telephone loop. We join others on this panel 
in urging this Committee to move vigorously toward strong safeguards. 

Second, and more importantly, it is essential to include in S. 1822 the principles 
of localism-provisions that will mandate regulatory recognition of the importance of 
local news and information. 

LOCALISM IN TELECOMMUNICATIONS 

I would like to focus my remarks on the second point, and explain why it is essen- 
tial to the survival of small community newspapers that a localism provision that 
mandates regulatory recognition of the importance of local news and information be 
included in S. 1822. 

Mr. Chairman, our members are community newspapers. Most of them are inde- 
pendently-owned and the publishers, by and large, are also their owners. Our read- 
ership is focused, in the majority, outside large urban areas. In fact, recent survey 
data show that 35 f)ercent of our newspaper readers live outside a Standard Metro- 
politan Statistical Area (SMSA). The remainder of our readers are in suburban and 
small urban areas. Our membership also includes urban community newspapers, 
representing African-American, Hispanic and Asian communities, as well as other 
areas of interest. 

Small newspapers serve a very important social role in American society, for our 
members are generally the focal points around which our country's communities 
build and maintain their identities and their sense of communal self. We play a par- 
ticularly important role in rural areas, for we are the institutions that maintain a 
sense of identity and social cohesion in rural towns and villages. When a rural town 
loses its local newspaper, the town could lose its identity, and even, in an extreme 
case, shrivel up and die. 

When considering public policy affecting media, it is often common to conjure up 
an image of very large newspapers, television personalities, and magazine publish- 
ers, but it is tremendously important to consiaer the impact of public policy upon 
thousands of publications like ours. In shaping our Nation's telecommunications in- 
frastructure, one cannot ignore, either in the marketplace of ideas or in the market- 
place of advertising, the thousands of local publications that exist throughout the 
country-publications that reach more than 30 million people every week. 

Contrary to the perceptions of many who predict the downfall of the newspaper 
business, we know that community newspapers are an enduring breed. We will 
serve our communities into the 21st Century because the local news and informa- 
tion that we provide to our readers cannot be surpassed by any other provider. In 
fact, as the larger media become more global, we know that the need for community 
newspapers to fill the niches that they leave behind has become more intense, liie 
need nas been created by the thirst for local news and information, for local political 
coverage, for access to local decision-makers and for networks of community organi- 
zations, without which America cannot survive. And this need is being addressed 
by a mix of print and electronic services. 

We are not the Luddites of the media world. In fact, I will chair a seminar this 
spring in Nashville, where publishers in our region will explore electronic delivery 
options. Our small newspapers led the trend in newspaper publishing to offset print- 
ing, to desktop publishing and now to electronic and digital technologies. It is not 
uncommon among our membership for the printed page to be composed in one rural 
office and transmitted by modem to a production plant IS miles away. No satellites, 
no fiber optics, just simple technology on a pair of twisted copper wires. As our read- 
ers change with the coming of the electronic information age, community newspaper 
publishers will provide the gateways to local electronic publishing services for those 
readers. 



134 

My comments on the need for localism provisions in this bill rest upon my obser- 
vations of problems our newspapers will encounter as they increasingly explore 
services for readers. 

I speak from my own experience. 

I am among the publishers exploring voice technologies. Many of us are now de- 
veloping audiotex services. And the National Newspaper Association is now urging 
newspapers to explore Nil (or N-one-one) phone numbers as a viable pathway for 
audiotex. But we barely got our engines revved up before we ran into problems. 

The first problem is also the last: the folks who build the highway don't have us 
in mind. They are thinking in megabucks, measuring in millions and surveying the 
landscape with empires in mind. While we wait for the outcome of such tantalizing 
dramas as the many ongoing corporate takeovers and some of the looming conrunu- 
nications "mega-mergers," we, the local publishers, could be quietly building the side 
roads onto this intricate map. But we have already found that we cannot easily get 
the telephone companies to turn their attention to us. We are too small and too lo- 
calized to mount costly legal and regulatory campaigns, and we are therefore largely 
ignored. 

Without the help of Congress, the on and off ramps simply won't be built because 
the folks busy designing the cloverleafs are thinking mostly about the roads leading 
to big cities and population-dense suburbs. But the simple fact is that there is no 
good reason to burden the citizens outside these hi^ly-competitive urban areas 
with a long wait and high barriers to new services. 

All that is needed is the direction of Congress-in emphatic and flSrceful terms-that 
access, rates and competition must be designed with these local areas in mind. 

ACCESS 

First, local electronic publishers need to get direct access to the telecommuni- 
cations network. Direct access for smaller players cannot be ignored while the 
thrust of pending bills is to provide guidelines for interaction and competition be- 
tween extremely large corporations. 

On the future information superhighways, the Bell Operating Companies will un- 
doubtedly be partnering with large, national information companies. The Bell Com- 
pany willprovide the hardware and the large electronic publisher will provide the 
content. The proposed bills focus on the relationships between the Bells and these 
larger companies and on the relationship those partnership will have with competi- 
tors. However, it is difficult to see how a local community newspaper could hope to 
compete with giants of this size without a recognition in public policy that local 
news and information is essential. 

On the other hand, if a regulatory framework can be adopted that would safe- 
guard the opportunity of the local electronic publisher to "get on line," the technical 
and rate framework will follow. Such a framework is possible to construct without 
subsidies and without disadvantage to other travelers on the highway if the law re- 
quires common carriers not to foreclose local providers access and to track their 
costs with localism in mind. 

RATES 

Localism in rates is an important need. Let me be specific about a problem that 
I encountered in East Tennessee. 

In November, I applied to the Tennessee Public Service Commission for a three- 
digit telephone code within the Nil range. I expected a welcoming response from 
South Central Bell, which has repeatedly offered itself to community newspapers as 
a business partner. In fact, during the late 1980s, when Congress began exploring 
the ramifications of the 1982 Modified Final Judgment, South Central Bell wasted 
no time advising us that if it were free to compete in information services, commu- 
nity newspapers would be valued business partners. 

I turned to the PSC with full expectation that when I sought to redeem that 
promise, the telephone company would begin thinking of the potential partnership 
with my newspaper — not to mention hundreds of other newspapers in Tennessee. 
I knew from my own research that the opportunities offered through use of an Nil 
number would provide a transitional technology to introduce my readers to a low- 
cost, readily accessible electronic information service. My goal was to introduce my 
community to this option so the citizens of Morristown would have access to the 
same opportunities as the citizens of the Maryland suburbs in our Nation's capital, 
where I understand the opportunity for an Nil number is also being explored. 

I have experience with audiotex services. Last fall, I initiated a free calling service 
by use of a vendor called Info-Connect, which provides a server and switch of 11 



135 

telephone lines and 343 different selections of information. This service has already 
proven invaluable. 

For example, last month during the threat of blackouts from electric utilities 
throughout the Middle Atlantic and Mid-South regions, the president of our local 
power company called to alert me that portions of Morristown might have to be 
switched on. I asked him how he intended to inform the homes and businesses in 
the target areas of the power comptiny's rolling blackouts. 

He replied that the power company would put the announcements on the radio 
throughout the day, including the nours when most of our citizens are at work. 



"Do you keep a radio at your desk all day?" I asked. 
"No, he said. "I don't even have a radio here." 



"Then how'd you expect people to know when they're about to be lose power?" I 
asked. 

"It's the only way we have to tell them," he replied. 

I responded with the following offer. I would make my audiotex service available 
for him to call in each hour to record the blackout schedule. The power company 
could announce via the newspaper as well as other media that the telephone num- 
ber was available. Citizens could dial in at their own convenience to learn the sched- 
ule and plan their days accordingly. It was a win/win situation for us all. The pwwer 
company could serve its customers with predictability. Businesses could shut down 
their computers and other operations safely before the blackout. Residents could re- 
arrange their days to avoid the impact where possible. And the newspaper could 
provide a valuable service. 

As it turned out, the blackout was avoided. But both the Citizen-Tribune and the 
power company learned a valuable lesson in the exercise, and we believe our com- 
munity is tne stronger for it. Well be ready the next time. 

This service was free to the consumer and to the power company. I provided it 
as a community service because that is one role I play in my community. However, 
I operate a small business, by the measurements of the other telecommunications 
companies here. In order for me to provide a service, I must have a reliable, short- 
term revenue stream. And it is in the Nil number that 1 hope to discover that reve- 
nue stream. If we can develop that service, it will be a low-cost offering to my read- 
ers, and it will provide the newspajier the basis for developing further, more sophis- 
ticated services. 

But look what happened to me. 

The Tennessee Public Service Commission provided me a provisional Nil number. 
In my case, it was 511. During the process, it ordered the telephone company to 
develop a tariff for Nil numbers. When the telephone company originally returned 
with a proposed tariff, it was clear that it had no intention of providing this service 
whatsoever. The original tariff submitted by the telephone company did not even 
consider areas outside the four major metropolitan areas in Tennessee. After peti- 
tion by my newspaper and others outside those metropolitan areas, the revised tariff 
was broken into two tiers. The upper tier, for the larger metropolitan calling areas, 
has an initial fee of $27,000. For the lower tier, covering more rural calling areas 
like mine, the start-up fee is $22,000. The phone company is not merely seeking this 
initial $22,000 investment from my newspaper, but it insists upon a minimum bill- 
ing from my 511 line of $10,000 each month. 

Mr. Chairman, the data in the industry so far suggest that I can expect about 
15 percent of my readers to use this line. On the Morristown scale, that means a 
little over 3,000 readers will dial 511 each month. For me to recover just South 
Central Bell's share of this service, I would have to chaise each reader over $3.00 
per call. 

Citizens in suburban Atlanta pay only a tiny fraction of that amount per call. 

Clearly, in this scenario, the citizens of Morristown are being disadvantaged by 
the mere fact that they choose the quieter life of a small town. 

This example is nothing but a roadblock to our attempts to create more on-ramps 
to the information highway. We recognize that it is our job to blaze these trails. And 
we recognize that we are out here on a side road of the glamorous and vaunted in- 
formation highway. We are willing to take on that task, Mr. Chairman, but we need 
the power of Congress behind us. 

The problem oi rates can be solved without subsidies, without creating economic 
inefficiencies, and without disturbing the plans of the larger highway. All that needs 
to be done is for the state policymakers and the phone companies to turn their eyes 
in our direction and to strip down the costs of a smaller service so that our commu- 
nities can afford to pay. 

All that we ask is that Congress to direct the states and the common carriers to 
design their systems, their cost structures and their rates with our small towns and 
rural areas in mind. 



136 

COMPETITION 

If a community newspaper has more than one source for its telecommunications 
needs, many of our concerns are significantly reduced, since competition in the mar- 
ketplace is the ultimate solution to the free flow of ideas. However, we know full 
well that competition in the local loop is going to come to smaller communities at 
the end of the telecommunications revolution, if ever. Until full competition is avail- 
able throughout our country, we need to assure regulatory fairness if local informa- 
tion is to have equal footing with national information. 

CONCLUSION 

Accordingly, we ask this Committee to uphold the principles of localism in writing 
and developing its teleconmiunications legislation. We urge the committee to accept 
our support of the larger safeguard goals of this bill with the full awareness that 
without a recognition of the importance of local news and information, local elec- 
tronic publishers will not be truly protected. 

I want to thank you, Mr. Chairman, and the Committee for hearing our concerns. 
We are delighted to work with you and your staff in addressing these very specific 
needs and to support your efforts in the passage of S. 1822. 

The Chairman. Very good, sir. Ms. Weis. 

STATEMENT OF HON. SANDRA WEIS, DIRECTOR, 
GOVERNMENT AFFAIRS, PRODIGY SERVICES CO. 

Ms. Weis. Mr. Chairman and members of the committee, my 
name is Sandy Weis. I am director of government affairs for Prod- 
igy Services Co. The Prodigy service, as many of you know, is the 
most popular on-line service and has more than 2 million members 
nationwide. 

I would like to thank you for the privilege of appearing here 
today on behalf of Prodigy and the Electronic Publishing Group, a 
coalition of electronic information content providers. Prodigy and 
EPG are united in their view that now is the time for legislation 
that will provide a forward- looking balanced and procompetitive 
telecommunications and information infrastructure policy. 

We particularly want to thank you Mr. Chairman, and you Sen- 
ator Danforth, and all your colleagues on both sides of the aisle 
who recognize that the entire electronic publishing industry needs 
effective safeguards. Electronic publishers are people who create in- 
formation content and provide it to customers on line. Today, this 
industry is hot. Today, this industry is vibrantly competitive, and 
it has been from the start. 

This reliance on competition, shielded as it has been from anti- 
competitive behavior, has resulted in world leadership in electronic 
publishing for this country. This industry is all about diversity of 
information services and sources. I do not believe that it is an exag- 
geration to say that such diversity is the lifeblood of our democ- 
racy. 

As S. 1822 recognizes, local exchange providers continue to enjoy 
significant market power in the provision of local exchange serv- 
ices. The Nation's telephone system will, for the next several years, 
continue to be the only two-way electronic lane on the information 
superhighway that is available to everyone's home and to all busi- 
nesses. Until local competition develops and electronic publishers 
do have choices for the delivery of their services to consumers, safe- 
guards such as those that you have crafted in S. 1822 are abso- 
lutely necessary to preserve the free flow of information. 



137 

Let me speak to these safeguards, starting with who is covered 
by the separate subsidiary requirement. S. 1822 defines "electronic 
pubHshing^ clearly and comprehensively. We believe this definition, 
in contrast to other approaches under consideration, is sound pub- 
lic policy for the following reasons: 

First, the definition treats all electronic publishers the same. 
There is no legal or policy justification for discrimination among 
electronic publishers on the basis of format or subject matter, and 
no one knows what future products will look like. I can certainly 
assure vou that the products Prodigy delivered last year are dif- 
ferent n-om those we offer today, and next year they will be dif- 
ferent once again. Your bill accommodates the rapid-fire changes 
that are going on in this industry. 

Second, the "electronic publishing" definition, contrary to Mr. 
Cullen's statement, removes ambiguity, and therefore the potential 
for costly and unnecessary litigation over what is or what is not en- 
titled to safeguards protection. 

Third, the definition does not affect the Bell operating companies' 
ability to upgrade their networks to provide advanced services, the 
Nation's information superhighway. In addition to the separate 
subsidiary requirement. Prodigy and EPG endorse the provisions in 
S. 1822 that would provide privacy protection for customer propri- 
etary network information and ensure availability on a nondiscrim- 
inatory basis, require the unbundling of and provision of equal ac- 
cess to local exchange networks, and ensure that rate-payers do not 
bear the cost of Bell company provision of information services. 

In closing, we support S. 1822 because it will promote local ex- 
change competition, advance the Nation's electronic infrastructure, 
protect CPNI, advance universal service goals, and establish effec- 
tive statutory safeguards to preserve competition in the provision 
of electronic publishing services. 

I want to thank you again on behalf of Prodigy and the Elec- 
tronic Publishing Group for the opportunity to be with you today. 
It has permitted us to play a part in the important work which this 
bill represents. We firmly believe that the end result of this effort 
will be the establishment of an enduring public policy framework 
for the information society that lies ahead. 

Thank you Mr. Chairman and committee members. 

[The prepared statement of Ms. Weis follows:] 

Prepared Statement of Sandra G. Weis 

My name is Sandra Weis. I am Director of Government AfTairs of Prodigy Services 
Company, the nation's most popular interactive network, which provides hundreds 
of informational and interactive features nationwide to consumers and smaller busi- 
nesses. Today my testimony will also reflect the views of the Electronic Publishing 
Group ("EPG"). 

EPG is a coalition of electronic information content providers which includes, 
among others, American Business Press, Inc., Association of American Publishers, 
CCH Incorporated, Cox Enterprises, Inc., Dun & Bradstreet, McGraw-Hill, Inc., 
Mead Data Central, Inc., Prodigy, and West Publishing Company. EPG's members 
originate, edit, compile, collect, integrate and distribute information content using 
electronic media. Prodigy and EPG are united in their view that S. 1822 — which 
would advance America^ telecommunications infrastructure, maintain this country's 
worldwide technological leadership, and promote a diverse and competitive environ- 
ment for both communications and electronic publishing services — is necessary now. 

The importance that forward looking, balanced telecommunications and informa- 
tion infrastructure public policy will have on the economic, social and cultural future 



138 

of this nation cannot be over emphasized. The widespread availability of an afford- 
able electronic infrastructure is the foundation for communications, services and ap- 
plications. Procompetitive policies that address electronic infrastructure and tele- 
communications issues are essential building blocks for the electronic future. 

We applaud you for your vision and commitment to bring these issues before the 
Congress. And I welcome the opportunity to offer the views of Prodigy and EPG on 
S. 1822, the "Communications Act of 1994," which we strongly support with particu- 
lar respect to its treatment of electronic publishing services. 

The PRODIGY service is an example of the fMtential and power of the National 
Information Infrastructure ("Nil"). As early as the mid-1980s we saw the possibili- 
ties for our Nation's emerging Information Superhighway, its potential for wide- 
spreadpublic popularity and the need to be able to reach the mass market electroni- 
cally. That is why we structured our electronic delivery system on a scale that can 
be expanded to serve tens of millions of Americans in their homes, enabling them 
to communicate as an extended electronic community. 

Prodigy launched the PRODIGY service nationally in 1990. Today more than 
2,000,000 Americans are PRODIGY members using hundreds of information and 
transaction services including news and information, money and travel databases, 
educational and entertainment features, and communications. Each day we handle 
some 700,000 PRODIGY sessions and some 100,000 electronic bulletin board post- 
ings. Prodigy's new e-mail gateway to the Internet has enjoyed unexpected popu- 
larity and is generating more than 300,000 messages a montn. 

January's earthquake in Los Angeles, which disrupted long distance service and 
traditional information flows, is a prime example of tne power of this new medium. 
By 6:30 a.m. West Coast time on the morning of the auake, a bulletin board was 
established on the PRODIGY service. This not only allowed thousands of people 
from around the country to learn whether their relatives and friends were safe, but 
provided up to the minute, first hand reports on the quake and its aftermath. In 
fact, we had 813,000 sign-ons that day, the second largest number in Prodigy's his- 
tory, exceeded only by election eve 1992. 

Prodigy and the members of the Electronic Publishing Group support legislation 
that will: (a) encourage competition in the provision of all types oi telecommuni- 
cations products and services and particularly in the provision of local exchange 
services; (b) promote the development of a feature and technology rich, unbundled 
and transparent public network; (c) establish statutory safeguards to promote com- 
petition and prevent discrimination by the Bell Operating Companies ("BOCs") in 
the provision of electronic publishing services; (d) provide privacy protection of most 
customer proprietary network information as well as ensure the availability of CPNI 
on a non-discriminatory basis; and (e) urge the maintenance and appropriate en- 
hancement of universal service goals. S. 1822 represents a major step forward to- 
ward realizing these goals. 

As S. 1822 recognizes, certain telecommunications markets, particularly those for 
local exchange services, are not fully competitive. Consequently, incumbent local ex- 
change providers continue to enjoy major market power. We therefore endorse the 
efforts in the pending legislation to open these markets to new opportunities for 
competition. In the interim period before competition develops to an effective level, 
however. Congress and the Administration should require that electronic publishing 
services provided by BOCs in competition with independent entities be offered sub- 
ject to effective regulatory safeguards. Those safeguards must be designed to foster 
competition in local telecommunications services while preserving a competitive in- 
formation marketplace. 

The nation's telephone system has been and will continue to be for the next sev- 
eral years the only interactive electronic lane that is open on the Information Super- 
highway that goes to everyone's home and to all businesses. Until competition 
emerges, it is vitally important that all content-based services receive the benefit 
of pro-competitive safeguards. We submit that each and every electronic publishing 
service merits such protection, as long as the providers of those services remain de- 
pendent upon monopoly-provided local exchange facilities to reach customers, and 
vice versa. 

The delivery of the PRODIGY service exemplifies that "first electronic mile" bot- 
tleneck issue and the critical need for safeguards. Conventional POTS telephone 
lines permit PRODIGY members to connect to Prodigy's national distributed deliv- 
ery network. With a PC and modem, a member typically dials a local phone number 
and is connected to a Prodigy local site. Prodigy's distributed delivery system pro- 
vides more than 700 separate phone numbers for members to reach Prodigy, thereby 
enabling some 80 percent of U.S. households to connect to the Prodigy interactive 
network with a local telephone call. Prodigy local sites connect to Prodigy's national 
data center using state-of-the-art high speed digital telecommunications links pro- 



139 

vided by competitive long distance carriers. Today there is no widespread, aflbrdable 
and available "first electronic mile" except the phone system that can connect both 
consumers and all businesses to the Information Superhighway. 

Since its service was first on the drawing boards in the mid-19808, Prodigy has 
been exploring ways to reach consumers using higher sp>eed digital lines that can 
accommodate two-way, real time applications. Today, top delivery speeds of 9600 
bits per second limit electronic services to the delivery of text, simple computer 
graphics and limited images. Prodigy has been working with phone companies to 
move toward digital, higher bandwidth phone services. We are also proactively ex- 
ploring other technology alternatives that can provide sufiicient bandwidth for real 
time, two-way electronic services. 

Prodigy has begun testing delivery of its service over cable, with the first test 
starting in San Diego last November. Cable's wider bandwidth allows PCs to receive 
information substantially faster than analog phone lines and will permit delivery of 
video and two-way multimedia services. I want to emphasize, however, that while 
the San Diego test and other explorations of alternatives to telephone delivery are 
widely regarded as important strategic steps in the convergence of cable and com- 
puter technologies, there is still a long way to go — in terms of technology, competi- 
tion and public policy — before any significant alternative electronic lanes will be 
open to either homes or all but the largest businesses. This is equally true for vir- 
tually all electronic publishers. 

Accordingly, to protect competition S. 1822 properly requires BOCs providing any 
electronic publishing services over any part of their local exchange bottlenecks to 
do so only through fully separate subsidiaries. As discussed in more detail below. 
Prodigy and EPG strongly support the approach taken in S. 1822 to achieve this 
important public interest goal. 

DEFINITIONAL ISSUES 

The definition of "electronic publishing" in S. 1822 represents a substantial im- 
provement in terms of both clarity and utility over other pending legislative defini- 
tions of those services. Unlike such other definitions, which invite future disputes 
and wasteful litigation over their coverage, the definition in S. 1822 unambiguously 
incorporates all content-based services commonly understood as electronic publish- 
ing. Moreover, it appropriately includes all such services delivered over any part of 
the BOCs' local exchange networks, including advanced digital wireline facilities. 
Thus, for purposes of enabling rational business planning alone, the S. 1822 defini- 
tion is superior to other proposed formulations. 

But, the definition in S. 1822 also represents good public policy independent of 
such considerations. Indeed, there is no sound legal or policy justification for dis- 
criminating in the competitive protections offered to certain classes of content-based 
services. Virtually all electronic publishing offerings still remain dependent upon 
the local exchange for distribution of their information content to end users. Dif- 
ferences in the safeguards treatment of particular electronic publishing subject-mat- 
ter, formats, or presentations can only distort the marketplace, disrupt the free flow 
of information, and generally undermine the public interest goals of the NIL 

Nor can it be argued that the definition of electronic publishing contained in S. 
1822 will somehow inhibit the enhancement of networlc functionality and intel- 
ligence. Electronic publishing services are now successfully provided by non-tele- 
phone company businesses on a fully separated basis from the local network. Thus, 
there are no substantial efficiencies or economies that would be lost by requiring 
a separate subsidiary, as has been essentially conceded by both the telephone com- 
panies and other publishers in the House debates. Further, S. 1822 contains numer- 
ous exceptions to the electronic publishing definition that expressly permit the inte- 
gration of intelligent network services. No showing has been made that these provi- 
sions are inadequate to meet the network upgrade objectives of the Nil. 

In sum, the protections afforded electronic publishing by S. 1822 represent good 
public policy because they are clear, they are comprehensive, they are measured, 
and they will promote rather than impair realization of the NIL 

SAFEGUARDS REQUIRED 

Defining the services subject to safeguards is an important step. Equally crucial 
is establishing a package of pro-competitive safeguard requirements that can be ef- 
fective in preventing potential marketplace dislocations. Prodigy and EPG submit 
that such safeguards must, at a minimum, mandate non-discriminatory treatment 
of competitors vis-a-vis a local exchange carrier's own electronic publishing oper- 
ations. 



140 

One ftindamental aspect of such a policy would be reversal of the current regu- 
latory double standard for access to Customer Proprietary Network information 
("CPNI"). This is information about telephone subscribers and their network usage 
that is collected by the local telephone company in the course of its monopply ex- 
change operations. The existing rules skew opportunities for the use of and access 
to CPNI in favor of local exchange service providers who both generate much of this 
information and hold the keys to its first and easiest use. Because of 
CPNl'ssubstantial value in developing and marketing information products and 
services, permitting disparate access to CPNI unfairly creates competitive inequities 
and undermines the puolic interest in a robust and competitive marketplace for in- 
formation services. 

Accordingly, we support those provisions of S. 1822 which would redress this im- 
balance and submit that they are a necessary part of a procompetitive legislative 
package seeking to promote the National Information Infrastructure. This legisla- 
tion recognizes the privacy interests of network users by affording customers the op- 
portunity to control the disclosure or use of CPNI that raises substantial privacy 
concerns. It also ensures that, to the extent that monopoly-derived data about cus- 
tomer usage of the network may be used for non-network purposes, BOCs would be 
statutorily barred from discriminating with respect to the access to, and use and 
disclosure of , all such CPNI. This prohibition applies whether the data be individ- 
ual or aggregate, proprietary or non -proprietary. Thus, BOC personnel or affiliates 
would not gain any advantage over information providers in accessing CPNI data 
by virtue, for example, of knowledge of what type of data exists or the form by 
which customer consent is obtained. We would additionally support giving the FCC 
a role in determining what information raises such substantial privacy concerns. 

We further support the imposition of structural separation requirements that ef- 
fectively segregate the competitive electronic publishing activities I described earlier 
from BOCs regulated operations. As currently provided inS. 1822, those require- 
ments would largely prohibit joint activities between a local exchange carrier and 
its electronic publishing affiliate and ensure that the affiliate operates completely 
independently of the carrier. We would like to work with you to ensure maintenance 
of these goals. 

Equally importantly, carriers should offer their exchange network services on an 
open, non-discriminatory, and fully unbundled basis as provided in S. 1822. More- 
over, where competitive alternatives are not available, those services should be of- 
fered under tarifT at just and reasonable, verifiably cost-based rates. Finally, a BOC 
should not be permitted to provide the separate afliliate with any facilities, services, 
or information, including CPNI, unless the carrier also makes such facilities, serv- 
ices, and information available to unafiiliated entities upon request and on reason- 
able terms and conditions. 

Prodigy and the Electronic Publishers Group appreciate the opportunitv to ex- 
press our views on these critically important matters. With respect to our electronic 
publishing issues, S. 1822 will foster the development of a sophisticated and effi- 
cient network infrastructure and promote the delivery of diverse and exciting elec- 
tronic publishing services to the public. We commend you for your efforts and prom- 
ise to work with you to see these provisions enacted into law. 

The Chairman. Thank you very much, Ms. Weis. 

Mr. Cullen, let me take advantage of your appearance to get 
right to the crux of one thing that is disturbing to me. We have 
got a general reaction in the introduction to this measure, the first 
hearing, and it has generally been favorable. There are a lot of 
good suggestions, as you have made and others have made here 
today. But there is one particular onslaught relative to the entry 
into long distance that seems to be the real crux of the advance- 
ment of anv measure at this particular time. 

I might be mistaken, but the intent in the drafting was to have 
a test; namely that, yes, you can get into manufacturing, you can 
get into information services, wim some of the amendments or 
changes that have been suggested here — ^you could get into long 
distance outside of your own region. But we took the in-region test 
from the hearing record made last year because this is a culmina- 
tion now of the leadership of many, particularly Senator Danforth 



141 

and Senator Inouye, as to when should the Bell companies be al- 
lowed into long distance. 

As I understood it, the Bell companies said well, there should be 
the test, and they use the very verbiage that was in the 1982 deci- 
sion of Judge Green and reaffirmed in his 1988 decision that there 
should be no substantial possibility of using monopoly power to im- 
pede competition. And I had several meetings, and I can tell that 
I am meeting with lawyers. I am a lawyer and I can tell where I 
am getting a lot of lawyer's talk. If you had any lawyer analyze any 
bill, nothing would ever pass Congress, and I realize that. 

In the drafting of this bill, we tried to specify just exactly what 
was intended and what is substantial possibility: I mean, monop- 
oly, we changed that to market. I had to yield to the interpretation 
made with respect to our friends in the alarm business relative to 
the Department of Justice. I do not believe they belong in this at 
all. But we are trying to — I have to give on what the majority 
thinks if we are going to get something done. 

And we said, well, let us not get the Department of Justice. You 
have the Federal Communications Commission, you have the local 
public service utilities, and we eliminate the Department of Jus- 
tice, definitely, and to be more specific and not as severe on the 
RBOC's by saying market power. And you say monopoly power, I 
mean, you just about ruled out — if I am the lawyer on the other 
side you are not going to get any, ever. So, we did that to clarify 
what "to impede competition" means. 

Can you tell me what test you would use? I mean, we took it, 
based on what the seven RBOC's had written earlier last October 
to this committee, and particularly to our ranking member Senator 
Danforth. We used that particular definition and tried to specify 
with the intent of getting past the vagueness. Now, I understand 
it is being interpreted as a bunch of hurdles. Could you furnish the 
committee what test — ^you think there should be a test, I take it? 

Mr. CuLLEN. Yes, Mr. Chairman. Let me address that, if I may. 

The Chairman. Because that is the one thing disturbing to many 
on the committee. 

Mr. CuLLEN. I do not believe that any of the regional Bell operat- 
ing companies would quarrel in the least with the language that 
you have just outlined. Perhaps even all the hundreds of lawyers 
who look at it would be in agreement that this is appropriate lan- 
guage. I think in fact it is the business people in the regional Bell 
operating companies who look at the language that goes well be- 
yond the VIII(c) language you have just outlined here and provides 
an entry test, provides a competition test that is the crux of our 
problem. So, to simplifV my response, I would say to you sir that 
I believe that we would absolutely agree to the VIII(c) language 
that you have just described. 

Where we have a problem is from the business side in looking 
at other barriers to entry where, in effect, our fate in getting into 
a business would be left in the hands of the long-distance carriers 
and whether they choose to provide local exchange service. Now, I 
can tell you that in 80 percent of our area long-distance carriers 
and alternate access vendors will not choose to provide local ex- 
change service. It is not profitable. Perhaps in 95 percent of South 
Carolina or Missouri they would not choose to provide local ex- 



142 

change service. They absolutely would not in Morristown, TN. It 
will be 40 years before anyone chooses to provide it. 

So, the difficulty is that W3 need to prove that there are competi- 
tors for local exchange service, that the competitors are offering 
substantially the same service, and that a significant number of 
local exchange customers have taken that service. I think that is 
the crux of our difficulty with the entry test, and it is not, sir, the 
VIII(c) language. 

The Chairman. Well, you must be acknowledging in the VIII(c) 
language that there is a substantial possibility of monopoly power 
being used, because that is the way the language starts. You say 
substantial possibility of monopoly power being used. We start with 
that. 

Mr. CULLEN. No, sir, if I could just 

The Chairman. That is the VIII(c) language. 

Mr. CULLEN. I think it is no substantial possibility that we will 
impede competition. 

The Chairman. But a substantial possibility of the monopoly 
power being used to impede competition, that is word for word the 
way the language reads. I have had to go through it saying how 
did we screw up here. I mean, heavens above, we took their lan- 
guage. And rather than all them jumping up and clapping and say- 
ing whoopee, we won, the fellow wrote our language that we wrote 
in a letter last October, instead we are being condemned. And I 
want you to write it out for me. 

You start at the beginning with substantial possibility of monop- 
oly power being used. Now, we start there. 

Mr. Cullen. To impede competition. 

The Chairman. To impede competition. Well, I do not see wheth- 
er long distance or anybody else — obviously, we are very much con- 
cerned. In the original instance we sort of guaranteed you a monop- 
oly and protection for that monopoly and guaranteed you a profit, 
and you have done an outstanding job. 

Now I find I cannot really protect you in that monopoly situation 
because of technology and, as we call it, cherrypicking, like 
Teleport is doing in downtown New York. Now I understand in my 
back yard they are moving into Atlanta into profitable areas. So, 
we just took in one fell swoop and said we are going to make every- 
body common carriers and make them pay in. 

But as you indicate, if no one comes in, not just long distance, 
but if no one comes in for competition in that local service — MCI, 
I read a line that said they said they were going to use $2 billion 
to get in, but if no one did, and the figures show that you are get- 
ting anywhere between 12, 14 percent return and you are providing 
good service, that is pretty good business; is it not? 

Mr. Cullen. Yes, sir, except 

The Chairman. I mean, you do not have to go out and buy Para- 
mount or anything else. You are in good shape. 

Mr. Cullen. Except that in the 20 percent of our business that 
generates that return we have a lot of competition. It surrounds us 
here in Washington and in Atlanta and in other places. In the 80 
percent that does not provide competition — that does not provide a 
return, we have little competition, and we are therefore 



143 

The Chairman. I agree with you on that, and that is the thing 
that bothers me, that they are going to pick you off and the profit- 
able part of the business, and then the rural folks and the small 
newspapers and everyone else that you have to serve because of 
your obligation of universal service and we are concerned that you 
are able to continue to do that, instead of raising the rates. 

So, I am not on philosophy or principle at odds with you at all. 
But I just cannot understand how we wrote it wrongly. I want you 
to write it out for me word for word. 

Mr. CULLEN. Yes, sir, I would be happv to. In fact, if you look 
at the MCI announcement you will see that they are not coming 
to Morristown, TN, or even Charleston, SC. They are going to At- 
lanta. That is where their $2 billion is going. 

The Chairman. I am not a bit surprised. That is the one thing 
the Congress cannot get in its head. I mean, they think — we do not 
create any competition. We try to protect it so the competitive 
forces will work. We found out in air travel that yes, the competi- 
tion flying to Las Vegas and Los Angeles but not to Charleston, SC, 
I can tell you that now, it has just gone through the roof. So, the 
whole idea of public convenience and necessity has been totally dis- 
banded. 

I worked over the years with the airports, the cities, and built 
these airports, and then we went to the airlines and we came be- 
fore the old CAB and we had the hearing on convenience and ne- 
cessity. The airlines provided the service and it was a reasonable 
rate. We provided the facilities. Everybody was happy. And then 
along came this virus like we create competition and it is abso- 
lutely — I spend more time in Charlotte, NC, than the mayor does, 
I can tell you that. [Laughter.] 

Trying to get home it is $698 to fly round trip coach class for my 
wife. I get the Government rate. There is an advantage here. But 
my wife, $698 to fly coach class from Washington to Charleston 
and back. I have got a ticket on my desk where you can fly from 
Washington to Frankfurt, Germany, and back for $279. 

Now, we learn from experience, and we are trying to do the right 
thing and trying to get a bill passed. But we are going to get into 
a thing there where you can continue to cherrypick. I mean, we do 
not have to pass a bill but we do have a bipartisan feeling that it 
is our responsibility and we really have not been sort of responding 
to our responsibility properly, and I would like for you to write it 
out for us. 

Mr. CuLLEN. I would be happy to do that, and I think you would 
find it is VIII(c) language that would be agreeable. It is, in fact, 
a tough test. It is the test we live with today, and we would be 
happy to write that out. 

I think it is the added measures that leave our fate in the hands 
of other people choosing to come in and compete or not, so we 
would be happy to do that. 

The Chairman. Thank you. 

Senator Danforth. 

Senator Danforth, Well, Mr. Chairman, I do have some ques- 
tions, but Senator Stevens was here first, and I will follow him. 

The Chairman. Senator Stevens. 



144 

Senator Stevens. Well, you are very kind. I am pleased to hear 
more explanation of the RBOC major newspaper agp^eement, but let 
me tell you how I view this. And I would like you on the panel to 
tell me if I am wrong. I view this as restrictions would not apply 
to the provision of electronic publishing service by any non-RBOC 
local exchange, of which there are 1,400 nationwide, or to any 
RBOC outside of their local exchange region. And that in any event 
the restriction would sunset on June 30 in the year 2000. The re- 
striction would also not apply to electronic publishing by an RBOC- 
owned cable system in either the House bill or this bill, in my judg- 
ment, which, if you sum it up, what that means is that my entire 
State local papers and broadcasters will not have any protection 
under S. 1822 as it is now drawn. 

Now, we are looking at the problem of access and interconnec- 
tion. Some people tell me we may run afoul of the first amendment. 
But I have suggested to the committee title VII that will allow the 
FCC to have the ability to regulate access and interconnection of 
information telecommunications service, not the information itself 
but to protect access and the interconnection. 

Now, what is wrong with that? I think that is what Mr. Fishman 
was talking about indirectly. What is wrong with that? Mr. Cullen, 
why should we not have someone leveling this playing field for 
areas like mine which contain nothing other than local papers and 
small broadcasters and entirely outside of the area of any RBOC? 
We do have an RBOC-owned cable in Alaska, and if I see any trap- 
door in this it will be the RBOC's will own cable, particularly out- 
side their service areas, and have no regulation at all. Now, am I 
wrong? 

Mr. Cullen. Senator, I think these agreements that were 
worked out, in their original form represent a superb and a tough 
balance. I, of course, speak for the RBOC's and perhaps it is easy 
for me to say this, but I think they can apply just as easily to any 
local exchange provider. I think they are meant to apply to local 
exchange providers, whether they are independents or RBOC's. 
Speaking for the RBOC's, we have agreed to them. 

Senator Stevens. Why did you leave out your cable-owned sub- 
sidiaries outside of your local exchange area? 

Mr. Cullen. Primarily because a cable-owned subsidiary has ab- 
solutely no monopoly power in the way that allegedly the operating 
telephone companies do. So, I guess the view is that they are com- 
peting and customers have a choice. We focused on local exchange 
carriers and we spoke for the regional Bell operating companies. 

Senator Stevens. Do you think that broadcasters, local broad- 
casters, are within the scope of your agreement? 

Mr. Cullen. Local broadcasters who engage in the kinds of 
things we have described in three and one-half pages here would 
be covered and protected by this agreement, and local broadcasters 
by and large are looking for new ways to distribute their product, 
as are the newspapers and everyone represented on this panel 
today. 

Senator Stevens. So, only to the extent that they are lucky 
enough to be within the service area of the RBOC? 

Mr. Cullen. Yes, sir. Absolutely. 



145 

Senator Stevens. And they have no protection if they are in an 
area that is outside the RBOC's basic area but within an area 
served by a cable company owned by the RBOC? 

Mr. CuLLEN, Yes, sir, although I feel I must say that the FCC 
has looked at this whole set of protection since 1980. The courts 
have looked at the right to be in information services. Our view is 
that these protections are not necessary because of the layers and 
layers of other protections that would apply and that in fact we 
have been in this business for 3 years. GTE has been in this busi- 
ness forever of providing information services. To the best of my 
knowledge, the FCC has not received complaints about antitrust 
behavior. So, I would just point out that there is no clear track 
record of anticompetitive behavior, and in fact GTE, which serves 
some very large areas in this country, has been doing it for some 
time. 

But we agree that these are reasonable additional safeguards. I 
would just point out that there are many safeguards in place with- 
out these. 

Senator Stevens. The real problem that I have is that my news- 
papers in Alaska, my local broadcasters in Alaska, are beating a 
path to my door saying what about us. Nothing in this bill really 
gives them the reassurance that you all have reached by virtue of 
our agreement, because there is no one out there negotiating the 
protection for small newspapers and small broadcasters, particu- 
larly outside of any RBOC operating areas; right? 

Mr. CuLLEN. Yes, sir. That is accurate. I do not know that there 
is no one out there, but they are not covered by this particular leg- 
islation as it is written. 

Senator Stevens. Why should this sunset in the year 2000? Tell 
me the magic of that. 

Mr. CuLLEN. I think the only magic of that was, again, the essen- 
tial ingredient in this whole thing, that if we want large industries 
providing the content and providing the distribution mechanism to 
put up billions of dollars we need to have some level of predict- 
ability on what the ground rules are and how long they will apply. 

Second, as has been suggested a few times here this morning, we 
all know that competition for local exchange service is coming. We 
know that the technologies are bringing it, as Mr. Bennack sug- 
gested. We know it is several years away, and it seemed to us that 
the year 2000 was a reasonable compromise on how long these 
added safeguards should remain in place. 

This is a flourishing market, and as we know, 2 weeks can be 
a long time in our industry. Six and one-half years is certainly a 
very long time. 

Senator Stevens. My problem about that is my problem that I 
had with so-called safe harbor leading. By the time the concepts 
reached Alaska the thing had expired, but our people were not 
given the same advantage that the major industries were. Here you 
have this protection for the year 2000 in the major operating areas 
of the RBOC's. We may be in a RBOC area by 2001, but by the 
time they come to us there will be no level playing field protection. 
Why should you not have it sunset within the area of the RBOC's? 

You want your basic protection within the area of the RBOC's, 
the major newspapers do, but you say all this comes off for the rest 



146 

of the country in the year 2000. It looks to me Hke it is going to 
be an open sesame when we finally get connected up to the fiber 
optic highway, those of you that do. I do not think we will, basi- 
cally, but I have some real questions, and I think my friend here 
also has, about the rural areas. 

We really think, Mr. Chairman, we need a title VII. We need 
something that says what happens to us when this concept of mo- 
nopoly power finally reaches us. It is not there, I agree to that. 
There is no real opportunity for total monopoly power in our State 
yet, but it could well happen. I really have some question about the 
sunset. I have even more question about the open Sesame for the 
RBOC's outside of their operating area under this agreement. I 
think it is too easy to go buy a cable company. 

Let me go back. Mr. Fishman, one of the newspapers in my State 
is really owned and operated out of another State. It is within a 
RBOC area, but when it operates our newspapers it would not be 
subject to the protection that is involved in Mr, Bennack's agree- 
ment. What do the small newspapers think about that? 

Mr. Fishman. Last summer, Mr. Stevens, I had the great oppor- 
tunity to travel through your State, through Sitka and Ketchican 
and that particular area of the lower peninsula, and flew over Gla- 
cier Bay. And I want to tell you, that is one of the most beautiful 
areas of the world that I have ever seen. It was really fantastic. 

And you are absolutely right, I do not think that a lot of folks 
are going to be jumping up into that area to provide a lot of com- 
munications services in that area anytime soon. And that is par- 
ticularly the areas that we are talking about, in small communities 
such as those that need the protection of what we like to say in 
our testimony — and I have obviously talked to Mr. Burns about it 
at great length — we feel that there must be access, there must be 
fair access, it must be fair, equal weights to competition of what 
is going to be provided in Atlanta versus what may be provided in 
Spartanburg, SC type of thing or Sitka, AK, that we do not get 
knocked off the highway. 

We think that the provision in the public access section 103 of 
the bill that it talks about community newspapers and broad- 
casters and the smallest markets to obtain access to intrastate and 
interstate services provided by such carriers is preferred weights. 
We think that that is very good. 

Now, as to whether or not in the bill, to be brutally frank about 
it, whether you are outside of an RBOC area, I cannot comment on 
that. I have not thought about that particularly. But I think it is 
very important that your small newspapers in Alaska, Montana, 
that they have the opportunity to compete on this super informa- 
tion highway, that they can provide local information to the people 
of those particular areas. 

Senator Stevens. Well, Mr. Chairman, I remember a law school 
professor of mine who talked about you have always got to make 
sure who is the monkey and who is the cat's paw because when the 
monkey takes the cat's paw and gets the chestnut out of the fire 
it is always the cat that gets burned; right? 

Now, tne real problem here is that — and I am pleased to hear 
what you said, Mr. Cullen, you feel that broadcasters within the 



147 

RBOC area are entitled to the same protection under your agree- 
ment as small newspapers; is that right? 

Mr. CULLEN. Senator, if they are offering any one of the three 
and one-half pages of services that we have listed, yes, sir. In fact, 
all information content creators would be covered if they offer these 
services. 

Senator Stevens. Well, my broadcasters did not believe that was 
the case, so I would be happy if there is any modifications nec- 
essary to make sure that tnat intent is carried out. But clearly, 
outside of the RBOC's areas they are not protected, and they are 
particularly not protected if they are in an area served by a cable 
system that has the tremendous flow of an RBOC behind it. And 
in my judgment, the subsidiary of an RBOC that has that cashflow 
has the capability of exercising monopoly power. I think that has 
to be looked into as far as this Bill is concerned. 

Mr. Bennack. Senator, could I comment on at least one aspect 
of what you talked about? I certainly have no disagreement with 
you with respect to having the safeguards apply to all monopoly 
telephone providers. I think what Mr. Cullen said and I have to say 
is that we did not engage in negotiations with them. We engaged 
in negotiations with the KBOC's. The MFJ covered the RBOC's. 

Vast numbers of small newspapers across the country are within 
the territories of the regional operating Bells, but I want to be very 
clear that making these provisions apply wherever there are local 
telephone exchange providers is appropriate in my view and I 
would be supportive of that. It is simply not a part of an under- 
standing of supporting the legislation on their part. I do not know 
what their reaction to it is, but I favor it. I think you are absolutely 
right that these safeguards belong to all providers. 

Second, any electronic publishers would have the protections. 

Presently, of course, which is the final point I would want to 
make, none of us has any protections against this. The state of the 
law today is not only in Alaska but everywhere there is an absence 
of protection against these possible abuses. We are here pursuant 
to compromise to change that. This is not the bill I would have 
written if I could have written the bill on how newspapers would 
be treated on the electronic superhighway, but we have been given 
to believe by the Congress that the absolute banning of the 
RBOC's, or tne kinds oi provisions we originally sought were not 
feasible. 

We believe that the protections that are in this bill in the main 
do provide a level playing field and will cause the growth of this 
field of electronic publishing. 

Senator Stevens. I support the competition concept, and I thank 
you for your comments, but it does seem to me that unless we have 
some protection for access and interconnection there really will be 
no ability to compete from these small providers. 

And I also think that at the time you negotiated your agreement 
you really did not have in mind the total competition of cable with 
telephone and newspapers, and the wide open competition that is 
still envisioned. 

Once we get to the point where all a RBOC would have to do is 
buy up cable companies and have no reflation at all outside of 
their basic RBOC area, I think we are going to see a real competi- 



148 

tion between RBOC's buying cable companies, but that is not going 
to protect newspapers and broadcasters. 

I think we have to find some way to assure that competition 
across the spectrum, as it develops. I agree, you all negotiated in 
the areas where the competition was intense and I congratulate 
you. I think you have given us a good format. But I hope that that 
same format will spread to the rest of the country as the potential 
for the exercise of monopolistic power is developed. 

Thank you. 

The Chairman. Very good. Senator Bums. 

Senator Burns. I must be a long way behind here. 

The Chairman. That is all right. Your distinguished ranking 
member yielded to you. We would like to hear from the local boys. 

Senator Burns. Thank you very much, and I thank this panel 
this morning and apologize for getting here a little bit early, but 
two verv important issues for my State are SBA and, of course, this 
issue wnich we have been involved in for quite a while. 

I want to brag just a little bit here to this committee about Mon- 
tana newspapers, and when we start talking about information 
services and this type of thing that I can remember, Mr. Fishman, 
a few years ago that newspapers out there got a little excited about 
what I was trying to get done in the State. But they are also now 
on the leading edge of any State of using an information highway 
to share information and to provide a better product for their cus- 
tomers and their readers. And I would say I think also they have 
improved their profit picture quite a little. 

So, we have listened to their concerns and we have tried to ad- 
dress their concerns in, I think, a commonsensical way. And now 
Montana newspapers and broadcasters are poised right now, on 
this localism language that I insisted be included in the legislation 
to lead the way as my State approaches the Information Age. 

I just have a couple of questions for you and then I want to stick 
pretty much to what I have laid out here that kind of goes along 
my thought line. I have a fantastic memory, but it is short. 

Mr. Fishman, what does the language on localism mean to more 
than 5,000 newspapers in the NNA? I think we have to figure out 
what that really means to this committee before we can go forward 
with any kind of legislation. 

Mr. Fishman. Senator, what the language in the bill means to 
5,000 newspapers across this country, small information providers, 
the localism provision means that they can be competitive, that 
they will have access to the super information highway, that they 
can get on the highway, that they are not going to be knocked off 
the highway, that they are not going to become road kill by the mo- 
nopolies or the big boys running them off the highway. If they want 
to start an audiotext system, that they have the opportunity to do 
that. 

No. 2 is, as the chairman has pointed out or Mr. Cullen pointed 
out, it is probably going to be a long time before we have competi- 
tion in Morristown, TN, in the local loop, and I think that this is 
a very important factor that only we have fair access but that when 
we do not have — we have got to have fair rates out there as to 
where it does not cost 35 cents in Atlanta because of the service, 



149 

because of the numbers, that in Montana or in Morristown, TN 
that we can provide that same service. 

So, we have got to have costs — base rate services in that area, 
and I think the bill provides that. And I think that is what it does 
as far as localism is concerned 

Senator Burns. You are fairly familiar with my State of Mon- 
tana. Would you agree with me that most of those newspapers 
there should be considered as local, community newspapers? 

Mr. FiSHMAN. Yes, sir. 

Senator Burns. It is my understanding Vice President Gore sup- 

Eorted my efforts in the Senate to include localism language in this 
ill. Is that correct to your understanding? 

Mr. FiSHMAN. Yes, sir. I met with Vice President Gore about 3 
or 4 weeks ago and he agreed with our position; yes, sir. 

Senator Burns. Mr. Bennack, the electronic publishing provision 
in the Brooks-Dingell bill that passed yesterday by the House sub- 
committee, identical to the agreement negotiated between the Bell 
operating companies and the Newspaper Association of America — 
is that correct? Is the language the same? 

Mr. Bennack. The only difference to any great extent is the defi- 
nition issue that Mr. Cullen addressed earlier. There is some dif- 
ference in the definition of electronic publishing in S. 1822 versus 
the Brooks-Dingell bill. But most of the provisions, the safeguard 
provisions et cetera, are identical for the most part. 

Senator Burns. Mr. Cullen, in your view Brooks-Dingell lan- 
guage on electronic publishing, is it the same as we have here? 

Mr. Cullen. Oh no, it is very different. The language in Brooks- 
Dingell versus the language here is very different, particularly in 
the definition of "electronic publishing." 

This language in S. 1822 goes well beyond the agreement, well 
beyond the language that is in Brooks-Dingell, and includes things 
like entertainment, consumer material, other literary material. I 
mean, there is a whole host of added things that, frankly, no one 
can define that have been added. 

And so while we thought we had a good, tough, delicate balance 
in including three and one-half pages of definition, so that we could 
be very precise, very tangible. We now find a great deal of lan- 

giage in addition. In addition, this bill has gone back to Judge 
reene's 1984 definition that applied to AT&T which, again, no one 
can define and added that. 

Senator Burns. Well, do you think that it is not the same, and 
you kind of explained that, do you feel that the NAA should sup- 
port your position on this stand. I mean, should be get these lan- 
guages matched up some way or another? 

Mr. Cullen. I think we should. I think we had very broad lan- 
guage, very sweeping language that, frankly, was difficult for us to 
agree to. I know there were difficulties on the NAA side as well. 
And so we would strongly advocate that we look word for word at 
the changes that have been made because, frankly, I think they de- 
stroy the original intent of the agreement and the Brooks-Dingell 
bill. 

Senator Burns. Mr. Bennack, would you agree, and his is a point 
we have got to talk about in this legislation I would hope, and 
would you agree with the assessment of Mr. Cullen then? If that 



150 

was the deal that was struck on the House side, should we proceed 
in the same manner here on the Senate side? 

Mr. Bennack. We are satisfied with the definition that was con- 
tained in Brooks-Dingell, to be very specific, and that is the defini- 
tion along with all the other provisions on which we agreed with 
respect to this section of the bill. 

Senator Burns. Mr. Chairman, I would suggest when looking in 
that area that we should take a look at those definitions in the in- 
formation services, and that the negotiation that was worked out 
between the two parties here — I think we should consider a change 
in the bill with that respect so that we could probably get over that 
hump when we start talking about this on further down the line, 
if you would take that as a suggestion? 

The Chairman. Yes, sir. 

Senator Burns. Also, Mr. Lynn, just so all the folks will know 
that this is the computer services of Mr. Perot, and I suppose you 
have already identified that as the hearing went underway. 

Mr. Lynn. He is our former chairman. 

Senator Burns. I imagine he still has quite a lot of influence 
today. 

Mr. Lynn. He is no longer connected with EDS. 

Senator Burns. But I have always found that connections do not 
always connect with influence, either. 

For the record, Mr. Lynn, how much did Ross Perot sell EDS to 
General Motors for, and just can you give me a general idea of 
what the company is worth today, and what is your projection for 
the year 2000? Services like you, as big as you are, where do you 
think you are headed? That is pretty personal. 

Mr. Lynn. EDS was acquired by General Motors in 1984, and our 
revenues this year are something around $8 billion. And we hope 
to be a $25 billion company by the year 2000. 

Senator Burns. All of this, of course, is done and you can move 
information. In other words, you are not in the business of manu- 
facturing anything, but the majority of your business is moving in- 
formation in huge lots. 

Mr. Lynn. That is correct, and that information moves over fa- 
cilities provided by the long-distance carriers as well as the local 
phone companies. 

Senator Burns. I understand you are in Bethesda, MD, and in 
Michigan? | 

Mr. Lynn. We are in Herdon, VA. We are in almost every State. 

Senator Burns. Except Montana, and I am sure that when you 
look at the Nation information superhighway — the point I am try- 
ing to make here is that I think this opens up opportunities for a 
lot of States to participate in this highway, and how important this 
issue really is to the economic development of any State in any 
part of the country, and how important this is. That is the point 
I am making here this morning. 

Mr, Lynn. We certainly would agree with that. And as I men- 
tioned previously, our concern — and I am really here on behalf of 
all of the computer services industry, and 85 percent of ITAA's 
members actually have revenues less than $20 million a year. But 
our concern is, of course, that the computer service industry was 
not a party to any of this negotiated agreement that took place ap- 



151 

parently between the newspapers and the Bell companies. And so 
in effect our business and most of the businesses of the ITAA mem- 
bers are not covered by the protections that apply to electronic pub- 
lishing, and we think that they ought to be. 

I should clear that ITAA has never believed that an entry test 
was necessary, that the Bell companies ought to be kept out of the 
information services business. It is our position that safeguards are 
sufficient, and when we say safeguards we really mean the types 
of protections that are in the provisions that apply to electronic 
publishing. We just believe that they should be extended to all in- 
formation services not just electronic publishing, which is a rel- 
atively narrow subset. 

Senator Burns. Thank you, Mr. Chairman. That is all of the 
questions I have at this present time. 

The Chairman. Thank you. Senator Danforth. 

Senator Danforth. Mr. Cullen, I apologize for not being here 
during your testimony. I have read your written statement. 

With respect to electronic publishing and the agreement that was 
made by the newspapers and the Bell companies, and you were 
part of that negotiation 

Mr. Cullen. Yes, sir. 

Senator Danforth. Does this bill track what you negotiated? 

Mr. Cullen. No, sir. 

Senator Danforth. Even with respect to electronic publishing by 
the newspapers? 

Mr. Cullen. It tracks in 95 percent of what is written, and there 
is page after page of protections, use of assets, people, audits. 
There is a long string of additional protections that were worked 
out that appear in this bill. 

The difficulty, though, is that the definition of "electronic pub- 
lishing" has been dramatically changed. 

Senator Danforth. I understand. Can I iust try to figure out 
where we do agree? The deal that you worked out, insofar as it per- 
tained to electronic publishing as you defined it, that is incor- 
porated in the legislation; is that not correct? 

Mr. Cullen. Yes, sir. 

Senator Danforth. And, therefore, to that extent at least do you 
agree with the bill? 

Mr. Cullen. I do, absolutely. 

Senator Danforth, What you disagree with is the extension of 
that agreement to forms of electronic publishing that extend be- 
yond the deal that you reached with the newspapers? 

Mr. Cullen. That is correct. 

Senator Danforth. Now, do you agree with the provisions of this 
bill relating to the burglar alarm industry? 

Mr. Cullen. I do because I think it is part of the package, but 
I would have to say that if we had enacted this in 1770 we would 
still have Paul Revere riding his horse to sound the alarm. 

However, I am agreeing to the full package and, therefore, yes, 
sir, I do. 

Senator Danforth. So, then, your point of disagreement is elec- 
tronic publishing beyond the newspapers and information services 
beyond burglar alarms? 

Mr. Cullen. Yes, sir. 



152 

Senator Danforth. And your view is that the limitations that 
are contained in the legislation would act to the detriment of the 
Bell companies. 

Mr. CuLLEN. I think my view is that in electronic publishing, the 
uncertainty and the broad, sweeping categories that have been in- 
troduced leave us with huge question marks about what would be 
covered. And, therefore, I think it would be a disincentive to invest 
in many of these systems. 

Senator Danforth. Well, there are safeguards which were nego- 
tiated with respect to the newspapers in electronic publishing, and 
there are safeguards relating to burglar alarms. 

Mr. CuLLEN. Yes, sir. 

Senator Danforth. And even though you would just as soon not 
have them, you agree to them? 

Mr. CuLLEN. Absolutely. 

Senator Danforth. Now, then, there are also safeguards that 
are contained in the legislation relating to other information serv- 
ices including electronic publishing beyond the newspaper agree- 
ment, and that is the point of your objection. 

Mr. CuLLEN. Yes, in the electronic publishing section. 

Senator Danforth. In the electronic publishing and also in the 
other information services. 

Mr. CuLLEN. And in addition, we have some problem with word- 
ing on gateways and other perhaps minor items, but there are a 
few of those. 

Senator Danforth. But iust trying to focus 

Mr. CuLLEN. Those are the big ones. 

Senator Danforth [continuing]. Not on every detail that you 
might disagree with, although we would be happy to go into that. 
But basically there are safeguards in areas that you, beyond the 
areas — strike that. 

You have agreed to safeguards in certain areas. 

Mr. CuLLEN. Yes, sir. 

Senator Danforth. This legislation provides safeguards in areas 
other than those that were agreed upon. 

Mr. CuLLEN. Exactly. 

Senator Danforth. And you believe that that would interfere 
with the business that the Bell companies would otherwise want to 
get into? 

Mr. Cullen. I believe that it would because these added defini- 
tions are virtually impossible to ever define. 

Senator Danforth. All right. What areas would you like to get 
into that would be impeded by these additional safeguards? 

Mr. Cullen. I do not think, Senator, it is a question of what we 
would like to get into. We are willing to build the delivery mecha- 
nism and have an affiliate provide services and content on it. We 
are willing to provide all of the protections that are in this legisla- 
tion. We simply do not know what coverage of something called 
"entertainment" would be. 

Senator Danforth. All right, now let me just repeat. You have 
agreed to the concept of safeguards in certain areas. 

Mr. Cullen. Absolutely. 

Senator Danforth. You do not agree with the concept of safe- 
guards in other areas. 



153 

Mr. CULLEN. I think it is fair to say we do not understand what 
the other areas would be. 

Senator Danforth. But if you believed in the concept of safe- 
guards in everything under the rubric of information services, then 
we would all be in agreement. 

So, you are saying that there are certain areas where safeguards 
shoula not extend. And I am asking you how does the extension of 
safeguards to areas where you do not want safeguards hurt your 
business? 

Mr. CuLLEN. With all respect, Senator, it is not that we do not 
want safeguards. If we look at this language we have an extraor- 
dinarily extensive and detailed list of what is defined broadly as 
electronic publishing that would be covered. 

When we attempt to go beyond it is not that we have hit some- 
thing we do not want to safeguards on. It is that we have hit some- 
thing we cannot precisely define. 

Senator Danforth. Well, what is the problem with having the 
same safeguards that apply to electronic publishing that you be- 
lieve you have negotiated, and the same safeguards that have ap- 
plied to burglar alarms with respect to nonpublishing and other 
forms of information services? What is the problem of extending 
those same types of safeguards throughout the whole area of infor- 
mation services? 

Mr. CuLLEN. It is simply that we do not know what is meant by 
consumer information, other literary material, credit material. It 
could conceivably block us from offering a home shopping service 
which is not intended to be covered by electronic publishing. 

So, again I would say that our attempt was to be very specific, 
every extensive about a broad definition of "electronic publishing," 
and we did that. And that covers a wide area of electronic publish- 
ing and information service applications. 

Senator Danforth. You may not agree with the fears that com- 
petitors that, say, the burglar alarm industry have expressed in the 
past or the newspaper industry have expressed in the past. But 
while you might not agree with them you at least understand 
them. 

Mr. CuLLEN. Absolutely. 

Senator Danforth. And do you understand the concern that 
other providers of information services have with the Bell compa- 
nies getting into that business? 

Mr. Cullen. I understand that there is a general concern. How- 
ever, I have to say that as we think about Citicorp and the Bank 
of America and EDS, they wield extraordinary market power. They 
can certainly deliver their services on our network or on private fa- 
cilities. 

And so I recognize there is a general concern. Our effort was to 
take all these general concerns and work them down into specific, 
tangible language. 

J^d, Senator, I would repeat again, we have been offering infor- 
mation services for 3 years, unrestricted and unlimited. GTE has 
been doing it for 12 years. 

Senator Danforth. How do you think, beyond what you have 
agreed to with the newspapers and beyond what you have agreed 



154 

to with the burglar alarms, how do you believe this legislation 
would impinge upon what your companies want to do? 

Mr. CULLEN. As we consider billion dollar investments in the in- 
formation superhighway 

Senator Danforth. Give me some for instances. 

Mr. CuLLEN. Well, for instance, if we are going to invest in a 
fiber network here in Washington, DC, to deliver a variety of serv- 
ices to consumers and we need all of the full separations that are 
required here, and that extends to building the fiber network, it ex- 
tends to services that we may be offering today. Most importantly, 
this loose and open definition would extend to seivices that we do 
not even know about today that a year or two from now may be 
offered. 

So, as we looked at these very practical business applications, 
the intention of this legislation I know the chairman has said many 
times, is to create the incentive to build it in fairness and equity 
for people who want to ride the highway. 

Senator Danforth. Well, I want to say to you I do not under- 
stand why it is not understandable and fair and reasonable to 
cover all electronic publishing under the rules that you have nego- 
tiated for some electronic publishing. And I do not understand why 
it is not equally reasonable and fair and equitable to cover all infor- 
mation services under the rules that you have negotiated for some 
electronic services. 

I mean, you basically have people in the same boat who have the 
same concerns. They may be competing for slightly different prod- 
ucts or for very different products, but exactly the same concerns 
that you have agreed to address with respect to newspapers and 
that you have agreed to address with respect to burglar alarms, 
you are going to say to the people in the same boat, "Well, just get 
out of the boat." 

Mr. CuLLEN. No, sir. What I would say is that we have addressed 
every specific, concrete application that has been brought to our at- 
tention. And the burglar alarm language — we simply cannot go into 
that business period, that is clear, for the period of 6 years. And 
so we view that as just being kept out of the business, and fine, 
we agree to that. 

But on electronic publishing, we worked through a very extensive 
list. We dealt with every single specific application that exists 
today or could exist, and I have not heard further specific applica- 
tions although something like video games was once suggested. 

Senator Danforth. You have not given me any specific applica- 
tions, and I have repeatedly asked you to give me some for in- 
stances, and you say you have not heard any. What are yours? 
What do you want to do that you think the general rules that are 
in this legislation would keep you from doing? 

Mr. CuLLEN. I think that, for example, if we applied this very 
broadly and we go back 4 or 5 years, we may have been prevented 
from offering voice mail services, for example, because that was 
viewed to be an information service. And so it is that sort of trap 
that we do not want to fall into, 

I think I would say, again, my point is there are no specific serv- 
ices that I have heard about that should be in this definition that 
are not covered. We made a good faith effort to sweep as much in 



155 

here as we could. And I would submit if you look at the language 
this is very, very broad. 

But, for example, Judge Greene once defined a "call before you 
dig" public utility service as an information service. Now, this is 
the sort of extreme lengths to which we have been dragged. We had 
to stop offering free weather and time calls. We had to stop offering 
to all utilities for free call us before you dig and we will tell you 
where our lines are. 

So, these are the kinds of extremes that leave us very willing to 
negotiate an agreement but very adamant that we want to be spe- 
cific about what it is that we agree to. 

Senator Danforth. Can I just ask, does anybody else want to 
comment on this? 

Ms. Weis. Senator Danforth, I would like to just emphasize that 
the treatment of the "electronic publishing" definition in S.1822 is 
crystal clear. It is comprehensive. It says that all electronic pub- 
lishers, regardless of their content, regardless of the format in 
which those publishing services are presented, are activity areas 
where the Bell operating companies certainly are not prohibited 
from being in them, that is not what we are talking about, but are 
required under this bill to offer those services, those activities, sub- 
ject to the separate affiliate requirement. 

One thing that is happening in our industry is that electronic 
services, electronic publishing services are changing dramatically. 
When Prodigy first offered its service in 1988 we wowed the indus- 
try because we offered nifty, colorful graphics and so forth. 

Well, today we are beta testing a product where the consumer, 
the Prodig/ member, defines first of all what content they want, 
and secona the format they want it in. So, what we are beginning 
to see in the industry is products are not going to bear much re- 
semblance to products that we see today. And certainly the narrow 
treatment that Mr. Cullen referenced in the House bill we feel is 
unnecessarily limiting. 

There does not appear to be anyone saying that there is a legal 
or policy reason to discriminate amongst electronic publishers. 

So, we believe that the treatment in S. 1822 very clearly covers 
electronic publishing and, of course, there is an extensive list of 
areas that are very clearly not defined to be electronic publishing. 
That list applies and makes it very clear that activities that would 
relate to advancement of the network, to the delivery of level 2 
gateway services and a whole host of other activities are not elec- 
tronic publishing. That is real clear too. 

So, we think that the treatment in S. 1822 makes it very clear. 
And this is essential. This industry is in flux. These safeguards are 
going to go for about a 6-year period. 

Costly litigation is not what our industry needs. My company 
Prodigy, for example, does not want to have to worry that there 
may be a problem in what our competitors can do or not do. 

So, we feel that the treatment in S. 1822 is exactly as it should 
be for the definition of "electronic publishing." 

Mr. Cullen. Senator, may I just very briefly add that when we 
talk Prodigy we are talking IBM and Sears, companies bigger than 
we are, much bigger than we are looking for some market protec- 
tion. 



156 

Second, this is not a new issue. This is an issue that the FCC 
and the courts have been examining for the last 10 or 12 years. 
The courts have decided, and affirmed in May of last year, that we 
should be — we could be in the information services business. 

If you read that opinion, it is very clear that the cost of informa- 
tion service and electronic publishers from the local exchange com- 
pany is somewhere between 5 and 8 percent of their total cost. It 
is minimal. And the opportunities to disadvantage them were also 
found to be minimal by the court in their opinion. 

The FCC found all of the separate subsidiary requirements that 
were originally envisioned and in fact in place for CPE and for en- 
hanced services to be unnecessary, to be expensive to consumers, 
and to be not needed. 

And so everything that we look at today is our agreement to add 
in additional layers of protection, many of them covering a broad 
set of services in order allay the concerns that I think you are ad- 
dressing here. 

Senator Danforth. Mr. Chairman, you have been very generous 
with the time. Thank you. 

The Chairman. I appreciate you covering that for us. Senator 
Robb. 

Senator Robb. Thank you, Mr. Chairman. I apologize, I had a 
conflict and was not able to be here for the opening statements and 
for the first round of questioning. I understand a couple of areas 
that I planned to explore have been explored and I would like to 
have an opportunity to look at the record. If there are additional 
questions I would like to request an opportunity to submit a ques- 
tion or two in writing for any clarification in that area. 

I have another conflict at this point, and my colleague and friend 
from West Virginia is here with what appears to be a very percep- 
tive list of questions to follow up, and I will yield to him. 

The Chairman. Very good, thank you. Senator Rockefeller. 

Senator Rockefeller. Trying to overcome that pressure, I think 
I ask this question on behalf of Senator Burns and myself because 
we are both very, very interested in the condition of health care in 
rural areas and the effect that all of this will have. 

In fact, ours is a history of decreasing health care opportunities 
for more and more rural people. Hospitals closing, people unable to 
get service because they cannot either afford to or just do not travel 
to places where they might be able to get service, and hence the 
whole problem of telemedicine — possibility of it. 

We developed something called a "mountaineer medical satellite 
network" which allows rural practitioners to participate with some 
of our more urban hospital centers in conferences via satellite in 
teleconsultation, so to speak, using digitalized phone transmission. 
And this provides access to people, to libraries, to information, and 
health people. Now, you know this I am sure, if not this particular 
program you know the problem in America about health care. 

Mr. Cullen, in your testimony you mentioned concerns that you 
have with how this bill treats what you call gateway services, and 
also incidental interLATA relief in the delivery of the kind of serv- 
ices that I believe I am talking about. So, could you elaborate for 
me on whether or not you think this bill helps with respect to that 



157 

or does not help. And, whether you answer yes or no, how you feel 
about it? 

Mr. CuLLEN. Yes, sir. Senator. In the case of gateway services 
the bill pushes us fiirther back in that it requires a computer sys- 
tem, a computer server in each LATA. I do not know that that is 
precisely what was intended, but that is what the language sug- 
gests and, therefore, we could not put in one computer server plat- 
form, for example, to serve all of West Virginia even though that 
may be technically exactly the right decision, and the economical 
decision, and one that would speed those services to West Virginia. 

And so I had earlier urged that we examine that language to 
change that on the gateway side. I think that is probably doable. 
We will work with the staff on that. 

Senator Rockefeller. It is language but not economics. 

Mr. CuLLEN. It is absolutely not economical, and there are some 
others that have to do with making it available to everyone simul- 
taneously in a State, which is virtually impossible to do. 

Again, I am optimistic we can work with the staff and work 
through those differences. I think a more critical issue is the oppor- 
tunity here for incidental interLATA relief, which is truly inciden- 
tal to the service, that would allow us to deliver telemedicine, infor- 
mation services, electronic publishing and, in fact, is vital to their 
delivery. 

So, with relief in the bill — it does not exist in the bill today. And, 
therefore, I am urging and urged in my testimony that we consider 
incidental interLATA relief for the provision of information serv- 
ices, wireless services where there is competition, and video serv- 
ices which would allow satellite uplinks and downlinks. 

I would again say, returning to telemedicine, that this will make 
delivery of these services and investment in the network not only 
more economical, it will accelerate that investment and it will 
make it much more efficient in delivering it to consumers, deliver- 
ing it to hospitals, delivering it to doctors. 

Senator Rockefeller. And the reason that you think that this 
can be worked out is through what compromise or confluence of 
views? 

Mr. CuLLEN. I think perhaps, I am really reaching, but I think 
in the language issue on gateway services and making it imme- 
diately available throughout the State, I think that could be 
worked through if we sit down with the staff and discuss our view 
of the meaning of that language. 

I do not want to be quite so sanguine about the prospects of 
working through interLATA, incidental interLATA. I think this is 
also doable if we are precise about our definitions. 

As we try to deliver information services and electronic publish- 
ing in which would be encompassed the telemedicine and the kinds 
of health care applications that you are referencing, we are blocked 
at LATA boundaries. Customers do not care about that. They want 
efficient, transparent delivery so that we would again be able to 
make our investments and deliver our services to customers if we 
were allowed to cross a LATA boundary. 

Today we are not allowed to cross the LATA boundary, so rather 
than considering the entire State of West Virginia or the entire 



158 

State of Montana we must look at it LATA by LATA, and in effect 
duplicate the investments. 

There was an example that the Pacific folks use about a lesser 
service, certainly, but an auto tracking service where they have got 
a great auto tracking service with a homing device on a car, and 
if it is stolen the police know immediately and they can track it un- 
less the thief is smart enough to find a LATA boundary, because 
it stops at the LATA boundary. 

Senator Rockefeller. Let me just say to the panel that I think 
we are going to do health care reform this year. It will bloody and 
there will be necessary compromises, I think, without giving up 
basic principles. But it will all mean nothing unless we can do 
telemedicine, and do it extensively, and do it in some cases across 
international boundaries, not just across State boundaries. Health 
care reform will mean nothing to Chuck Robb's southwestern Vir- 
ginia or to my southern West Virginia unless we are able to do this 
and do it quickly. 

The Chairman. I want the witnesses all on the panel to under- 
stand that we have made notes here about the different points and 
suggestions that we change the language of the proposed bill, and 
we also appreciate, of course, their support of the measure. 

Mr. Cullen, I have got a tremendous regard for you and you com- 
pany and I want to have an understanding. We might not agree, 
but at least we understand each other. 

Now, last year, Mr. Cullen, when you submitted the test, and we 
all agree there has got to be a test, the AT&T crowd on October 
5 wrote members of the committee and on their test they started 
off saying, amongst other things — it just hit me right away — no 
earlier than 7 years after the enactment may they even petition the 
Commission. 

Now, that is to start another 7-year routine, and then upon peti- 
tioning parts of the test, 30 percent or more of the telephone sub- 
scribers may obtain exchange services exclusively from an alter- 
native provider, and 75 percent of the telephone subscribers in that 
Bell company's region must have two or more alternative providers 
that gave services of comparable quality coverage, price, and capa- 
bility of the Bell company. 

Well, when I read that, I said the Bell companies would have to 
turn into REA's on the one hand and forget about ever entering the 
market. We are not buying that. Then I went, of course, to the 
VIII(c) test which you say you agreed to, and I want to read that 
for the record: 

The restrictions imposed upon the separated BOC's by virtue of section 2(d) shall 
be removed upon a showing by the petitioning BOC that there is no substantial pos- 
sibility that it could use its monopoly power to impede competition in the market 
it seeks to enter. 

Now, that is, word for word. Judge Greene's VIII(c). 

Then I go to your letter of specifically Ameritech's letter to Sen- 
ator Danforth dated October 20 on behalf of the seven regional 
companies, and they say — we will put the entire letter in so there 
is no misunderstanding, but I will just read "the modified final 
judgment provides just such a test." 

[The information referred may be found on p. 38.] 



159 

The Chairman. So, we are agreeing on a test. Everybody agrees 
there is a test, not just ipso facto after 1 year, 7 years, whatever, 
but rather that there would be a test looking to see that the mo- 
nopoly power not be used. 

Quoting again, "The modified final judgment provides just such 
a test. Recognizing that excluding a competitor from a market 
harms consumers, the MFJ provides that the line of business re- 
strictions including the long distance prohibition shall be removed 
when there is" — and this is in quote marks within the letter — "no 
substantial possibility that a regional company could use its mo- 
nopoly power to impede competition in the market it seeks to 
enter." 

Now, the next sentence seems to be the crux of this. You say this 
sentence does not require the elimination of the local exchange mo- 
nopoly. That is begging the question. If you do not — if you have 
still got the monopoly power, which you said you could not use it — 
they said no substantial possibility for its use. I mean, common 
sense savs you had better not have a monopoly power, and you 
just — well, the standard, this standard does not require the elimi- 
nation of local exchange monopoly. If you had the monopoly and 
did not use it, I can see a motion being made at the next board 
meeting that we find a new president. Come on. We live in the real 
world. 

I read further, and I quote from the letter, "Indeed, it assumes 
a continuation of substantial market power, if not a de jure monop- 
oly." 

Now, I agree that they could have the continuation of substantial 
market power, because that is why we defined it with respect to 
the long distance coming in. If long distance comes in under this 
bill, S. 1822, into that Atlanta market we were using as an exam- 
ple, the regional company. Bell South, could immediately petition 
the FCC defining Atlanta as a market and,by gosh, get into the 
long distance right there in Atlanta, too. That is the intent, I can 
tell you that. 

Now, I have asked you to spell out in the language where you 
think it is not clear, or it is confusing, or otherwise not provided 
for, but I want to yield and ask you to comment, because we do not 
agree this standard does not require the elimination of the local ex- 
change monopoly. If you have still got the monopoly, then there is 
certainly a substantial possibility that you could use it. 

So, I mean, that just contradicts. You say you are agreeing to the 
VIII(c) test, and you outlined it on behalf^ of the seven companies, 
no substantial possibility of using the monopoly power, but then 
you say you do not have to have monopoly power. 

Well, if you have got monopoly power, you have got the possibil- 
ity — not just substantial, you have got the total possibility of using 
that monopoly power at any time. I would rather go along and try 
to read as a lawyer would and trying to — that is exactly what we 
are doing, trying to eliminate all of these motions, petitions, and 
everj^hing else, like the AT&T group wanted. You could not even 
petition and then, if you petition, you make it virtually impossible. 
This standard does not require the elimination of local monopoly. 
Indeed, it assumes a continuation of substantial market power, I 
would agree with that. 



160 

Now, let me yield here, and let you comment. 

Mr. CuLLEN. Yes, sir, thank you. First, Mr. Chairman, we would 
absolutely aCTee with the language that you read which is VIII(c), 
which is today's test, which Judge Greene has administered and 
which has kept us out of this market for 10 years. We would agree 
with that, and we will submit that to you in writing. 

Second, I think — and I am not a lawyer, but let me interpret this 
as a businessperson. Our market power, our monopoly power, ex- 
ists in rural and suburban areas in different markets, in the local 
exchange market, and AT&T, MCI and Sprint, in an effort to keep 
us out of their markets so that they can continue to grow and con- 
tinue to expand overseas to 50 percent of their business has, in 
fact, linked the two. 

But I have said repeatedly there is no way under today's equal 
access rules, put in in 1984 as the remedy to all of the concerns 
that were addressed by the Department of Justice — today's equal 
access rules leave no local exchange carrier in a position to influ- 
ence in any way a customer's selection of a long-distance provider. 

These two markets have been totally separated, and therefore I 
would say that while we retain monopoly power in areas where 
long distance carriers like MCI choose not to provide local exchange 
service, and we will for some time, that the long distance market 
has been completely severed, completely separated by the MFJ, by 
Judge Greene, by equal access. 

The Chairman. And I agree. I understand that, but he had not 
completely separated with respect to the local. 

Now, we understand from the record made at the previous hear- 
ings, I think it was 99.2 percent, that was eight-tenths of 1 percent 
permeation, let us say, or penetration, I should say, of the local 
market with respect to the regional companies. You have still got 
an overwhelming majority. 

But we see it happening, like we said, with Telephone Atlanta, 
MCI's announcement, and that concerns us, and we say — or when 
you say the market, the different markets, that is why we say in 
the different rural areas or urban areas or otherwise that the re- 
gional company can define the market, and we provide that in 1822 
as I describe it, but it seems like there is a full court press relative 
to getting in, because we watch these ads. You know, if you put 
them in Roll Call we are going to read them, and you have got Bell 
Atlantic's ad right here. Remember this chart? 

Now, I think it is a dangerous ad from the standpoint of anti- 
trust. You say, "Last month America's big three long-distance com- 
panies did it again, raised prices in lockstep," and you say lockstep, 
that is conspiring together, and then you say later on, "Don't let 
AT&T, MCI, and Sprint get away with cozy price increases." 

I think Anne Bingaman ought to look at this one, because there 
might be — I practiced antitrust law, and Sherman antitrust and 
Robinson-Patman price fixing, that is the inference here. 

Now, we know otherwise, I think, and I could be very wrong. If 
400 companies in long-distance business — and we know when they 
get the same price that in and of itself does not prove the case. In 
other words, commodities on the regular futures market where 
they have got soybeans, pork bellies, or regular stocks, the price is 
the same and that is market forces, and if they are all going up 



161 

6.3 percent, then it seems like some of these other long distance 
competitors would be holding the line and getting that business, 
but I could be wrong. 

What you are now putting on — and I see we have got 1822, we 
have got the House moving on a bill, and what I translate these 
ads to mean is look, we are going to break up the monopoly in long 
distance, we the regional Bell companies, and we should be admit- 
ted to get into the long distance without a test, and immediately. 
Am I reading these ads wrong? 

Mr. CuLLEN. I think we would be agreeable to the VIII(c) test, 
sir. 

I should make clear that we do want to be in the long-distance 
business, there is not a shred of doubt about that. We want to be 
in the long distance business because our customers tell us that if 
vou are going to remain our provider for anything other than the 
basic — basic local exchange service, you had better be a full service 
provider. 

AT&T and MCI come in and say, come with us, we are going to 
provide all the profitable services you have. Leave that other stuff, 
listings and directories, leave that to them, come with us for access, 
come to us for toll, and so we are at a serious market disadvantage, 
and it is growing now with wireless services and with the acquisi- 
tion of McCaw. 

So, this is a market-driven, customer-driven requirement, and 
the concern that I have is that with all of these tests this will pro- 
tect the long distance market which is not monopolistic, but it is 
oligopolistic, and Wall Street analvsts have recently written some 
analysis of that, which I would be nappy to fiimish, that this is oli- 
gopolistic pricing. 

The fact of the matter is that our fate would really be in the 
hands of those companies. They do not want to serve Morristown, 
TN, they do not want to serve 80 percent of the United States, they 
do not want to be Federal Express and deliver the package to your 
door, they want to be American Airlines going to Atlanta. They do 
not want to have to stop in Charleston. 

So, the result is that we end up being unable to meet the same 
level of service that these very strong competitors can meet, and 
this is a major market disadvantage for us. 

The Chairman. And there is no intent on this committee to put 
the regional companies at a disadvantage, because when we put 
you at a disadvantage we put the consuming public at a disadvan- 
tage. 

You are the folks that are providing the universal service, the 
common carriers, and that is the gimmick in the test, and what we 
have to do is to make sure that you can continue, not at a dis- 
advantage, but continue to provide that universal service and yet 
at the same time not deter the competition and the technology that 
is coming in, and thereupon, that is why we make them all com- 
mon carriers, make them all pay in and put the VIII(c) test there 
and let the Bell companies define the market, and as I say again, 
if they can come into Atlanta they do not have to wait the 7 years, 
or whatever it is. 

One of the company officials indicated to me that it would be 7 
years before they could do anything. I said, write MCI a letter. If 



162 

they are coming into Atlanta, write them a thank you note, and let 
you get it, and both get in there, and the public advantages from 
it. That is the intent of 1822, I can tell you that. 

Do you have anything further, Jay? 

Senator ROCKEFELLER. I do not, but I have an opening statement 
that I would like to submit, and I am also very happy that your 
bill very specifically goes at this I think very fairly, and also with 
the consumer — protection of the consumer very much in mind. 

The Chairman. Well, we thank each of you on the panel very 
much. It has been very instructive here this morning. 

The committee will be in recess subject to the call of the Chair. 

[Whereupon, at 11:45 a.m., the committee adjourned.] 



S. 1822, THE COMMUNICATIONS ACT OF 1994 



THURSDAY, MARCH 17, 1994 

U.S. Senate, 
Committee on Commerce, Science, and Transportation, 

Washington, DC. 
The committee met, pursuant to notice, at 10:10 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Charles S. Robb, pre- 
siding. 

Staff members assigned to this hearing: John D. Windhausen, 
Jr., senior counsel, and Kevin M. Joseph, professional staff mem- 
ber; and Regina M. Keeney, minority senior counsel, and Mary P. 
McManus, minority staff counsel. 

OPENING STATEMENT OF SENATOR ROBB 

Senator Robb. The committee will come to order. This morning 
the committee continues our series of hearings on S. 1822, the 
Communications Act of 1994. 

Senator Rollings has asked me to express his regret that he can- 
not be here to open this hearing. He nas been called at this mo- 
ment to an urgent meeting of the Budget Committee, and will be 
here as soon as he can. As a matter of fact, I was scheduled to be 
over in both a hearing on nominations in Armed Services and a 
markup in Foreign Relations, and I have lefl those committees to 
come here so that we can get started on time. But I hope you will 
understand that we are playing with slightly different figures than 
you had anticipated starting this morning's hearing. 

In any event, a number of Senators will be joining us, and Sen- 
ator Hollings will be joining us as soon as he completes the activi- 
ties that require his specific presence over at the Budget Commit- 
tee. 

This morning's hearing will continue to explore two sets of issues 
contained in S. 1822. First, we will consider the provisions of the 
bill that permit the regional Bell operating companies, the RBOC's, 
to engage in manufacturing. These provisions are identical to the 
provisions of S. 173, the Telecommunications Equipment, Research, 
and Manufacturing Competition Act of 1991 which was sponsored 
by Senator Hollings in the last Congress. 

S. 173 passed the Senate by a vote of 71 to 24 in 1991, but did 
not pass the House of Representatives. S. 1822 would allow the 
RBOC's into manufacturing, subject to several safeguards to pre- 
vent cross-subsidizing and self-dealing. 

After the panel on manufacturing we will hear from several wit- 
nesses to discuss the provisions concerning media diversity and 

(163) 



164 

broadcasting. Broadcasters can be innovative and resourceful play- 
ers in the national information superhighway. 

S. 1822 encourages more flexible regulatory treatment of the 
broadcast industry to give television and radio broadcasters an in- 
centive to develop new services for the consumer. At the same time, 
the bill reaffirms the importance of protecting media diversity. In 
this regard, S. 1822 requires broadcasters to continue to serve the 
public interest even as they consider providing new, nonprogram 
services. 

We look forward to the testimony of the witnesses appearing be- 
fore us today, and before we begin I will ask Senator Packwood if 
he has an opening statement. 

Senator Packwood. I will let Senator Pressler go first. 

Senator ROBB. Senator Pressler. 

OPENING STATEMENT OF SENATOR PRESSLER 

Senator Pressler. Thank you very much, Mr. Chairman, and my 
colleague, Senator Packwood. Today's hearing on the provisions of 
S. 1822 is very timely. Many of my colleagues will recall the last 
time this committee was considering comprehensive revision of the 
Communications Act of 1934. In January 1982, we all know the 
AT&T consent decree was announced and derailed certain legisla- 
tive efforts. At that time I opposed the consent decree. I believe 
then and believe now that Congress, not the courts, should set com- 
munications policy. 

We will never know whether Congress would have passed a bet- 
ter solution to the competitive problems caused by AT&T's former 
monopoly. We do know that the breakup of AT&T in the consent 
decree, or MFJ, has brought competition and new services in some 
areas. 

Today the equipment manufacturing market is vigorouslv com- 
petitive. Consumers can choose from hundreds of models and 
makes of telephones. Businesses have their own equipment for 
switching inhouse calls. Telephone companies do not depend pri- 
marily on a single supplier for switching and transmission equip- 
ment. Hundreds of companies manufacture and supply tele- 
communications equipment. 

I support lifting the MFJ's manufacturing restrictions. At the 
same time, certain safeguards are needed. S. 1822 strikes the same 
balance the Senate adopted in the last Congress, when it passed 
S. 173. 

When S. 173 was debated on the Senate floor in 1991, I offered 
an amendment to ensure that small exchange carriers would have 
nondiscriminatory access to the equipment and software they need. 
The amendment passed the Senate. I am pleased these safeguards 
have been incorporated in S. 1822. 

First, Bell companies would be required to make software and 
telecommunications equipment available on a nondiscriminatory 
basis to other carriers. 

Second, a Bell company manufacturing affiliate could not dis- 
criminate or restrict sales of telecommunications equipment needed 
by smaller carriers if there is a reasonable demand and it can 
make a marginal cost profit. 



165 

Third, Bell companies would be required to engage in joint net- 
work planning and design with other regulated local exchange car- 
riers operating in the same area. These are important safeguards 
for small telephone companies. 

I do have one major concern with S. 1822 as currently drafted. 
Some of my colleagues, the distinguished ranking Republicans, 
Senator Danforth, Senator Packwood, and others, share my concern 
with the domestic content provisions of this bill. 

As many of you know, the U.S. Trade Representative, Mickey 
Kantor, wrote to Congressman Dingell and Congressman Markey 
regarding similar domestic content provisions in the House bill. 
Ambassador Kantor stated that the local manufacturing and the 
local content requirements would be viewed by our trading part- 
ners as inconsistent with existing U.S. obligations under the Gen- 
eral Agreement on Tariffs and Trade and the North American Free 
Trade Agreement and would jeopardize ongoing telecommuni- 
cations negotiations with the European Union. 

I ask unanimous consent that Ambassador Kantor's letter be in- 
cluded in the record at this point. 

Senator ROBB. Without objection Ambassador Kantor's letter will 
be included in the record. 

[The information referred to follows:] 

Letter From Michael Kantor, United States Trade Representative 

March 17, 1994. 
The Honorable Erne^ Hollings 

and 
The Honorable ROBERT Packwood, 
U.S. Senate, 
Washington, DC 20510 

Dear Chairman Hollings and Senator Packwood: I am writing in response to 
inquiries from Committee members about section 403 of S. 1822, which amends 
Title II of the Communications Act of 1934. The amendment authorizes the Bell op- 
erating companies to manufacture and provide telecommunications equipment and 
manufacture customer premises equipment, subject to local manufacturing and local 
content requirements. 

The broad framework of S. 1822 is consistent with the Administration's goals with 
respect to telecommunications reform. But as you know, as the President's chief 
trade negotiator, I have already expressed my reservations about the local manufac- 
turing and local content provisions of the bill. Attached is a copy of the letter that 
I sent to Chairmen Dingell and Markey concerning the identical provision in H.R. 
3626. In brief, we believe that the local manufacturing and local content require- 
ments of section 403 would be viewed by our trading partners as inconsistent with 
existing U.S. obligations under the General Agreement on Tariffs and Trade and the 
North American Free Trade Agreement and that both requirements would seriously 
jeopardize ongoing telecommunications negotiations with the European Union (EU). 

I look forward to working with you to achieve our mutual goals in the tele- 
communications sector. If we can provide further information, please let me know. 
Sincerely, 

Michael Kantor. 



166 

letter from michael kantor, u.s. trade representative 

February 28, 1994. 
The Honorable JoHN D. DiNGELL 

and 
The Honorable Edward J. Markey 
U.S. House of Representatives, 
Washington, DC 20515-6115 

Dear Chairman Dingell and Chairman Markey: I am writing in response to 
your joint letter of February 15. I am pleased to have the opportunity to assist the 
Committees in advancing our mutual telecommunications policy goals. As you know, 
in his State of the Union Address, President Clinton called upon Congress to enact 
in 1994 legislation that will help ensure the creation of the National Information 
Infrastructure. We are committed to working with Congress to usher in the next 
great information revolution. 

The broad framework of H.R. 3626 is consistent with the Administration's goals 
with respect to telecommunications reform. Your letter, however, refers to specific 
provisions of the bill that create problems, particularly from my perspective as the 
President's chief trade negotiator. Attached are detailed responses to the Questions 
posed in your February 15 letter. In brief, we believe that the local manufacturing 
and local content requirements of Section 229(cX4) would be viewed by our trading 
partners as inconsistent with existing U.S. obligations under the General Agree- 
ment on Tariffs and Trade and the North American Free Trade Agreement and that 
both requirements would seriously jeopardize ongoing telecommunications negotia- 
tions with the European Union. 

I look forward to working with you to achieve our mutual goals in the tele- 
communications sector. If we can provide further information, please let me know. 



RESPONSES TO QUESTIONS IN FEBRUARY 15 LETTER 

Question. It is our understanding the United States will resume negotiations with 
the European Union (EU) on the issue of government procurement of telecommuni- 
cations equipment. Specifically, these negotiations will seek to resolve the 3 percent 
price preference mandated by the EU for EU-made telecommunications equipment 
procured by the governments of member states. How would a domestic content pro- 
vision impact our negotiations with the EU as we try to resolve this impasse? 

Answer. We believe that both the manufacturing and content requirements of 
H.R. 3626 would seriously jeopardize our ongoing negotiations with the EU. In those 
negotiations, as you point out, the U.S. is seeking to remove barriers imposed by 
the EU on sales by U.S. manufacturers of telecommunications products to the gov- 
ernment-controlled telecommunications market in the EU. These barriers include 
not only a 3 percent price preference for EU-made goods, but also blanket authority 
to reject U.S. bids altogether, even if the U.S. bid beats the price preference. 

The latest round of negotiations occurred just last week. During these negotia- 
tions, the EU continued to insist that substantial barriers to sales of EU telecom 
products exist in the U.S. and should be removed. In fact, the EU negotiator cited 
H.R. 3626 as an example. As in the past, the U.S. maintained that it has no control 
over the procurement practices of U.S. telephone operators, such as AT&T, GTE and 
the Bell operating companies. We insisted that the U.S. market for telecom products 
is open and that AT&T, GTE and the Bell operating companies employ non-discrimi- 
natory purchasing procedures. 

In addition, as part of the bilateral agreement that is being negotiated, the United 
States has ofTered to send a letter from Ambassador Kantor to Sir Leon Britain of 
the EU, which states that AT&T, GTE and the Bell operating companies "do not 
discriminate on the basis of national origin or degree of foreign affiliation against 
the products or suppliers of the European Union in qualifying bidders, soliciting 
bids or supply proposals, evaluating bids or awarding contracts." 

Obviously, imposition of the domestic manufacturing and content requirements 
contained in H.R. 3626 would make it impossible for Ambassador Kantor to send 
such a letter and would severely undercut our argument that the U.S. has no con- 
trol over telephone operating companies. Enactment of section 229(c)(4) would make 
it less likely that we could successfully conclude an agreement with the EU guaran- 
teeing U.S. suppliers access to the EHJ telecom market, which is worth about $20 
billion annually. The Bell operating companies, if they are permitted to manufac- 
ture, would also gain access to that market. 

Question. Would the provisions of H.R. 3626 violate a ny article from the newly 
negotiated General Agreement on Tariffs and Trade (GAIT) or the GATT Govern- 



167 

ment Procurement Code? Could you supply a summary of any of the provisions 
within the GATT that would address or be affected by a domestic content provision? 

Answer. Section 229(cX4) could be challenged as inconsistent with Article 111:4 
and 5 of the current GATT and the new GATT 1994. Article III of GATT 1947 re- 
quires national treatment of products imported into the territory of a contracting 
party. This Article is incorporated into GATT 1994 as a result of the Uruguay 
Round. 

Article 111:4 requires that products of a contracting party imported into the terri- 
tory of any other contreicting party be accorded national treatment in respect of all 
laws, regulations and requirements affecting their internal sale, offering for sale, 
purchase, transportation, distribution or use. An agreement on Trade-F&lated In- 
vestment Measures (TRIMS), accompanying the Uruguay Round GATT, provides an 
illustrative list of measures that "are inconsistent with the obligation of national 
treatment provided for in Article 111:4." This list includes any domestic law which 
requires: 

the purchase or use by an enterprise of products of domestic origin or from any 
domestic source, whether specified in terms of particular products, in terms of 
volume or value of products, or in terms of a proportion of volume or value of 
its local production. 

Article 111:5 is even more specific. It prohibits a contracting party from establish- 
ing or maintaining "any internal quantitative regulation relating to the mixture, 
processing or use of products in specified amounts or propwrtions which requires 
* * * that any specified amount or proportion of any product * * ♦ must be sup- 
plied from domestic sources." 

Our trading partners would argue that Section 229(cX4), which requires at least 
60 percent domestic content in telecommuncations and customer premises equip- 
ment manufactured by the Bell operating companies, is a prohibited "internal quan- 
titative regulation" under Article 111:5. They would also argue that the local content 
requirement in that section would constitute a domestic law that requires the use 
"oi products of domestic origin" or that restricts importation of goods used in domes- 
tic production in violation of Article 111:4. 

We do not believe that the provisions of H.R. 3626 are inconsistent with U.S. obli- 
gations under the current or recently-negotiated GATT Government Procurement 
Code. The Code is concerned solely with procurement by governments of goods and 
services for their own use. 

Question. 3. Would any provision in H.R. 3626 violate the North American Free 
Trade Agreement (NAFTA)? Could you supply a summary of any provisions within 
NAFTA that would address or be affected by a provision of H.R. 3626? 

Answer. Both the local content and the local manufacturing reauirements could 
be challenged as inconsistent with the NAFTA. Article 301 of the NAFTA requires 
each party to "accord national treatment to the goods of another Party in accordance 
with Article III" of the GATT and incorporates Article III into the NAFTA. As noted 
above, Article III prohibits local content requirements. 

In addition, as discussed in detail in answer to the next question, the local content 
and local manufacturing requirements could be viewed by our trading partners as 
inconsistent with U.S. obligations under the NAFTA investment chapter. 

Question. What investment chapters in both the NAFTA and the GATT would 
apply? 

Answer. Article 1106 of Chapter Eleven of the NAFTA targets trade-diverting 
measures applied through investment "performance requirements." It applies to afl 
investments in the territory of a party no matter who owns them. Thus the U.S. 
is obliged to observe Article 1106, relating to performance requirements, not only 
for foreign investors but also for domestic U.S. investors. 

Article 1106(lXb) prohibits a party from requiring a domestic enterprise to 
achieve a given level or percentage of domestic content. Article 1106(lXg) prohibits 
a party from requiring an investor to supply a particular market solely from a do- 
mestic manufacturing facility. Our trading partners would argue that the effect of 
Article 1106(lXg) is to prohibit a requirement that the Bell operating companies 
supply the U.S. or any other maricet solely from facilities in the United States. 

As noted in answer to a previous question, the TRIMS agreement defines local 
content requirements to be inconsistent with the national treatment obligations set 
forth in the GATT. 

Question. What impact would the provisions of H.R. 3626 have on the U.S.-Japa- 
nese Framework Agreement negotiations which concluded on Friday, February 11, 
1994 with a meeting between the President and the Japanese Prime Minister, given 
that the Japanese have long been reluctant to negotiate any "quantitative indica- 
tors." 



168 

Answer. The provisions of H.R. 3626 are not directly related to our negotiations 
with the Japanese either under the Framework or otherwise. 

Question. How would section 229(cX4) be interpreted under national treatment 
provisions found in any trade agreement that the U.S. has signed? As you know, 
many of our trading part-iers maintain some sort of "buy national" policies; for ex- 
ample, Bell Canada has a preferred supplier approach in which its subsidiaries are 
given first bid, and the EC nas the 3 percent price preference. 

Answer. As noted in the answer to a previous question, both the GATT and the 
NAFTA require signatories to provide national treatment to products of other sig- 
natories and in that context prohibit imposition of performance requirements on in- 
vestors. The preferred supplier relationship between Bell Canada and its corporate 
affiliate, Northern Telecom, both of which are privately-owned subsidiaries of Bell 
Canada Enterprises (itself a privately-owned corporation), is not imposed by the Ca- 
nadian government and thus is not subject to GATT Article III disciplines. Nor does 
the relationship appear to be inconsistent with any provisions of the NAFTA. 

Given its breadth, the EU price preference may very well be inconsistent with the 
GATT Article III requirement of national treatment. Althou^ there is an exception 
in Article HI for government purchases for its own use, some of the utilities covered 
by the EU price preference are privately-owned. In addition, purchases by utilities, 
which provide services to the public, arguably are not purcnases for the govern- 
ment's own use. 

Question. How would adoption of such a provision affect our ongoing trade nego- 
tiating posture? 

Answer. We have been pursuing in a number of multilateral fora, such as the 
GATT and the Organization for Economic Cooperation and Development, and on a 
bilateral basis, the opening of investment regimes to U.S. investors and of markets 
for U.S. products and services, which are among the most competitive in the world. 
The stakes are enormous. As noted above with respect to procurement, we estimate 
the European public telecommunications market to be $20 billion annually and the 
Japanese public market to be $10 billion. Our negotiations to open these markets, 
as well as others, are undercut by any action which closes the tJ.S. maricet to for- 
eim products and which imposes restrictions on our investors. 

The U.S. is currently evaluating whether to negotiate a multilateral investment 
agreement and would expect any such agreement to target the imposition of such 
restrictions on private investors. 

Question. If this provision is adopted and it were determined that this provision 
violated NAFTA and/or GATT, what recourse would the U.S. government have to 
rectify this violation? 

Answer. If a dispute settlement panel found the provision to be inconsistent with 
the NAFTA, the United States would have the choice of either bringing the provi- 
sion into conformity with the NAFTA, through Congressional amendment or agree- 
ing on alternative trade compensation. The NAFTA provides that governments "nor- 
mally" should respond to panel reports by implementing the recommendations made 
by the panel. If, ultimately, we did not agree either to amend the provision or pro- 
vide agreed compensation, our NAFTA partners could withdraw equivalent NAFTA 
benefits. 

The current GATT dispute settlement procedures are essentially equivalent to 
those of the NAFTA, although the GATT discourages the provision of compensation 
as a long-term remedy for a trade violation and also permits defending countries 
to block the imposition of adverse panel reports, and thus prevent or forestall retal- 
iation. The dispute settlement provisions of the proposed World Trade Organization 
would allow panel reports to oe blocked only where all WTO member countries 
agree. 

Senator ROBB. Does that complete your statement, Senator Pres- 
sler? Senator Packwood. 

OPENING STATEMENT OF SENATOR PACKWOOD 

Senator Packwood, Mr. Chairman, thank you, and I want to 
continue where Senator Pressler left off. There is a lot in this bill 
that I like, and I am delighted to see the Bell companies being al- 
lowed into the manufacturing provision. But we are absolutely cut- 
ting off our nose to spite our face on the domestic content provision. 
It is outrageous that it is in this bill. 



169 

We export about 7.8 billion dollars' worth of telecommunications 
equipment now, and of the $7.8 billion, $6.8 is what you would call 
high-end equipment — not telephones, I mean high-end equipment. 
And in all of the arguments we have about competitiveness, what 
we say we should do is what we are good at, and what we are good 
at is very, very high end telecommunications and electronics, and 
that can be an expanding market. There is no reason why we can- 
not continue to lead the world in the production and the sale of this 
kind of equipment all over the world. 

I have the same letter that Senator Pressler had from USTR 
Representative Kantor, and as a matter of fact I am going to ask 
also to be placed in the record, Mr. Chairman, a letter dated March 
17 to Senator Rollings and myself on this same subject. 

Senator Robb. Without objection, that letter will be included in 
the record as well. 

[The information referred to is on page 165.] 

Senator Packwood. Thank you. There is no question but that 
this domestic content provision violates the existing GATT rules, 
violates the new rules under what is now the World Trade Organi- 
zation, which we used to call GATT, and violates the North Ajner- 
ican Free Trade Agreement. 

Worst of all, we are going around the world demanding that na- 
tions open their markets to our equipment, and especially to the 
things we are good at — high-end telecommunications. And this ab- 
solutely undercuts our ability to say to the world, "Open up." 

At the moment that the United States Trade Representative is 
able to say we have no Federal laws that prohibit the sale of your 
equipment in the United States. We have a private telecommuni- 
cations system, they can buy where they want, and that is true. 

But if we pass this and we go to Germany or Switzerland or 
Japan and say, "Open up," they point at this piece of legislation 
and say, "Why should we open up when you are closing up?" It is 
the most wrong headed, backward provision that is in this bill. 

I understand why it is in this bill — the unions want it. And the 
Bell companies, who I think are not wild about it, have agreed to 
go along in kind of a partnership with the devil in order to get the 
bill. 

But I have grave reservations about whether I can support this 
bill at all if this provision is in the bill. I thank the chairman. 

Senator RoBB. Thank you. Senator Packwood. We also have with 
us the ranking member of the committee, and a chief sponsor and 
author of the legislation, Senator Danforth. 

OPENEVG STATEMElSrr OF SENATOR DANFORTH 

Senator Danforth. Thank you, Mr. Chairman. I of course would 
appreciate it if at some point Senator Packwood might clarify his 
views on the domestic content provisions. [Laughter.] 

Senator Robb. We have him tentatively listed as undecided. 
[Laughter.] 

Senator Danforth. Well, Mr. Chairman, I do not think we have 
any choice but to remove the domestic content provision from the 
legislation in light of Ambassador Kantor's letter, which point 
blank says that it violates our obligations under both GATT and 
NAFTA. When our U.S. Trade Representative, who is of course a 



170 

lawyer by training, says that in very clear fashion it seems to me 
that we cannot knowingly pass legislation that is in violation of our 
legal responsibilities. 

Senator Robb. Thank you, Senator Danforth. Obviously those 
matters will be appropriate for farther discussion during the mark- 
up. 

This morning we are here for an informational hearing, and we 
have on the first panel four very distinguished witnesses. And un- 
less the witnesses have a particular reason for requesting to appear 
in an order other than the order that they are listed, I am going 
to ask the witnesses if they will appear as they are listed. And that 
would be leading off with Mr. Richard McCormick, who is chairman 
and chief executive officer of U.S. WEST. Mr. McCormick? 

STATEMENT OF RICHARD D. McCORMICK, CHAIRMAN AND 
CHIEF EXECUTIVE OFFICER, US WEST, INC. 

Mr. McCormick Thank you, Senator, and members of the Com- 
merce Committee. I am Richard McCormick, chairman and chief 
executive officer of US WEST headquartered in Denver, CO, and 
I appreciate the opportunity to testify on Senate bill 1822, specifi- 
callv on the removal of the restrictions on manufacturing by the 
Bell operating companies. 

By removing those restrictions you may create real opportunity 
for expanded employment, increased innovation, and improving the 
country's competitiveness. The Nation has been denied these bene- 
fits too long, and we appreciate your ongoing efforts to remove 
them. 

Thanks to the leadership of Senator Rollings, the Senate 3 years 
ago passed legislation to permit manufacturing by the Bell compa- 
nies. The House did not, despite the fact that there were 138 spon- 
sors of that legislation in the House of Representatives. 

So, American consumers were denied for another 3 years, 10 
years in total, the benefits of one-half million regional Bell employ- 
ees who could bring communications design and development ideas 
to the table. The result has been fewer new jobs, decreased innova- 
tion, and growing imports of telecommunications equipment from 
abroad. 

I would like to cite a few examples. In 1987 US WEST an- 
nounced the intention to build world class research and develop- 
ment facility. We saw the communications business becoming in- 
creasingly competitive, and we needed our own technological solu- 
tions in order to compete. We also needed solutions tailored to the 
wide open spaces of the region we serve. 

And while were still planning for that center. Judge Greene, who 
oversees the AT&T divestiture decree, ruled that restriction on 
manufacturing by the regional Bell companies included not only 
the metal bending and assembly and the like, but also the design 
and development of the manufacturing process. Even sitting down 
with a manufacturer and giving a proposed design solution on a 
piece of paper was a violation. 

US WEST today operates a state-of-the-art research and develop- 
ment facility in Boulder, CO. Perhaps I should say part-of-the-art 
facility because instead of employing the 1,500 scientists and engi- 
neers that we expected to have, we have about 600 there today. 



171 

Instead of, when they have a good idea, calling a manufacturer 
they first call a lawyer. Instead of thinking about enhancing com- 
munications they think about avoiding litigation. I can tell you 
they do not like it, neither do I, and neither does America's econ- 
omy. 

We have about 50 patents either in hand or applied for since our 
labs were formed, and we are proud of that. But I cannot tell you 
how many new products and services, how many new ideas for 
doing something faster or better or cheaper have died on the inno- 
vation table. 

I can tell you that a lot of people are asking why. Why are we 
keeping more than 50 percent of the domestic communications ca- 
pacity in this country on the sidelines, handcuffed from designing 
and developing the hardware and software we need to provide the 
networks of tomorrow. 

These are the networks that can deliver jobs to small towns, 
health care to rural areas, worldwide resources to neighborhood 
schools, and economic information and entertainment to American 
homes. Yet seven of the leading companies in the field are re- 
stricted in developing those services. 

Even with the antiquated roadblocks, we are working hard to de- 
velop full service networks. US WEST has announced and begun 
an aggressive program to build these multimedia networks within 
our 14-State region, and beyond. We are convinced they will be the 
key to delivering the services that I mentioned a moment ago, and 
to improving the quality of American lives. 

But delivering them will require new equipment, equipment we 
call video servers, to receive customer's orders and deliver services 
instantly, plus computerized set-top boxes to decode the signal in 
the customer's homes. 

The second example is this. The current rules prevent our ability 
to engage in detailed discussions with manufacturers about equip- 
ment design and some software to develop the full service networks 
of the future. We can say "No to this" or "Yes to that," but we can- 
not sit down with that pencil and napkin and say, "Here is what 
we need." 

We can design and write software that controls the bit stream on 
the information highway, but we cannot design the software that 
moves the bit stream. 

A final example relates to the overseas aspects of our business. 
We can do work overseas but we cannot do this work at home. We 
sat down recently with a manufacturer from Europe, and the dis- 
cussion on the table was an idea for fixed wireless service in a re- 
mote area of India. Had we had that discussion in the United 
States, had we had it in North Dakota, or South Dakota, or Mon- 
tana, or Nebraska that would have been a violation of the decree. 

And finally, we are receiving royalties from a Belgian company 
for a speech recognition design that we came up with that is used 
and manufactured overseas, and that is legal. We would be in vio- 
lation if this equipment was manufactured and used in the United 
States. Instead of better, faster, and cheaper we settle for ade- 
quately, slower, and maybe a little more costly. 

The companies that are closest to the customer find themselves 
in the strange position of instead of helping manufacturers develop 



172 

what our customers need, we end up hoping manufacturers will de- 
velop what our customers need. And to me that seems like the fol- 
lowing edge of technology and not the place that we want America 
to be in. 

The manufacturing intent of the Senate bill 1822 tackles that 
issue head on. And as you did in 1990, you have once again dem- 
onstrated that manufacturing restrictions can be set aside without 
harm to competitors or to consumers. There are numerous safe- 
guards in the legislation to quiet any concern about anticompetitive 
behavior. 

In conclusion, the seven regional Bell companies support the in- 
tent of Senate bill 1822 to ease the manufacturing restriction, and 
we thank you for your leadership in this issue, and the opportunity 
to testify. 

[The prepared statement of Mr. McCormick follows:] 

Prepared Statement of Richard D. McCormick 

Mr. Chairman, members of the Senate Commerce Committee, Fm Dick McCor- 
mick, Chairman and Chief Executive Officer of U S WEST. I appreciate the oppor- 
tunity to appear here today to testify on S. 1822. 

By way oi background, let me mention that I served in a variety of assignments 
in the Bell System prior to divestiture, Including positions at both the operating 
telephone company level and at AT&T. I began my telecommunications career in 
1961. 

My understanding is I'm to confine my remarks to provisions of the bill that ad- 
dress the manufacturing restriction of the Modification of Final Judgment. As you've 
heard in previous hearings and will probably hear in future proceedings, the Re- 
gional Bell Operating Companies have serious concerns about a number of provi- 
sions of S. 1822. But the manufacturing section, on the whole, is something we en- 
thusiastically support. I'm convinced that lifting the manufacturing prohibition of- 
fers real opportunity for job growth, increased innovation and for enhancing this 
country's glooal competitiveness. 

Unfortunately, we should have been able to exercise that opportunity three years 
ago. Thanks to your leadership. Senator HoUings, the Senate, in the 102nd Con- 
gress, overwhelmingly passed S. 173, legislation to permit Bell entry into manufac- 
turing. A companion measure in the House had 138 co-sponsors. But despite our 
best effort, even though we pushed the matter aggressively, the House refused to 
take up manufacturing as a stand-alone issue. Because a federal court had lifted 
the MFJ restriction on Bell provision of information services, there was some senti- 
ment in the House that the price for manufacturing freedom should be that we give 
back some of our court-won freedom to offer information services. We were unable 
to resolve that matter before Congress adjourned. 

So American consumers have been denied for another three years, 10 total, the 
benefits the half million RBOC employees could bring to communications design and 
development. The result has been fewer jobs, decreased innovation and needless 
frustration. Let me be specific. 

After the break up of^ the Bell System, U S WEST decided to build a world class 
research and development facility. Because we saw the communications business be- 
coming increasingly competitive and because the communications needs of the 
sparsely-populated geography we serve tend to be different than the communica- 
tions needs of customers in more densely-populated areas, we saw research and de- 
velopment as both a competitive advantage and as necessary to addressing the 
unique needs of our customers. 

So we committed to building a state-of the-art laboratory to house some 1,500 sci- 
entific and technical people, with plans to expand as demand warranted. But, as 
they say, "a funny thing Happened on the way to site selection. In December 1987, 
Judge Greene ruled that the manufacturing restriction extended beyond metal-bend- 
ing or fabrication to design and development as well. 

In the wake of the Judge's decision, we went ahead with our plans, but those 
plans were scaled back significantly. Instead of employing 1,500 scientists, research- 
ers, engineers, technical and support personnel, we employ 600. And instead of hav- 
ing free rein to use their imaginations — to think, to dream, to innovate — the work 
activity of those 600 people is very ti^tly restricted. 



173 

I think it's fair to say that in the early days of adjusting to Judge Greene's ex- 
panded definition of what constitutes manufacturing, our people struggled mightily 
to find that unknown line between what is and is not permissible under the MFJ. 
That's the needless frustration referred to. Whenever one of our people has a good 
idea, that individual must share that idea with a battery of attorneys who make 
their best judgment as to whether carrying that idea forward would violate the 
MFJ. As you might appreciate, scientific and technical people would rather spend 
their time with science and technology than with unknown legal issues. And so, re- 
grettably, they find ways to work around the legal morass. They don't let their 
imaginations run as freely. They're not as creative. They're more disapjwinted than 
entrepreneurial. 

And something is lost as a result. It would be interesting, but probably impos- 
sible, to try to quantify how many new products and services, how many new ideas 
for doing something better, cheaper, faster, died on the innovation table. And to 
what end? What possible good is served by keeping in excess of 50 percent of the 
domestic communications capacity of this country on the design and development 
sideline? 

I want to touch briefly on U S WESTs business plan. We have embarked on an 
aggressive program — both within our 14-state region and outside — to deploy 
broadband. We want to be the leader in providing interactive — that is, two-way — 
multi-media services — voice, data, video. We see a tremendous potential for multi- 
media — in health care, education, telecommuting and entertainment. 

But we're largely sailing in uncharted waters. The set-box and video servers it 
will take to make multi-media a reality aren't available from "off the shelf." They're 
stUl in the laboratory where engineers are trying to get the bugs out of them. The 
restriction severely compromises our ability to engage in design discussions with 
manufacturers. We can talk in generalities. We can say "no" to this and "yes" to 
that, but we can't talk in specifics. We cannot fully take advantage of our technical 
expertise, of our knowledge of our customers and of what they want and don't want. 
And so, instead of better, faster, cheaper, we do things adequately, slower and 
maybe a little more expensively. That's a prescription for the past, not the future. 
We cannot be leading edge if we're not free to follow through on our ideas. 

Curiously, we are Tree to do this offshore, just not in this country. So opportunity 
will migrate to Europe and Asia where we are free to invest, innovate, design, de- 
velop and manufacture. Yet under the current restriction, consumers in this country 
are denied the benefits of our experience elsewhere. 

And we're denied a return on our intellectual property. If a U S WEST scientist 
invents and patents a communications solution, the MFJ does not permit us to 
share in the royalties from that invention. At least not according to a recent court 
of appeals ruling. 

The manufacturing provisions of S. 1822 largely address those issues. As you did 
in 1991, Mr. Chairman, you've again demonstrated that the manufacturing restric- 
tion can be set aside without harm to customers or competitors. There are adequate 
safeguards in the legislation to quiet any concern about anti-competitive behavior, 
while at the same time, sufficient flexibility to enable the RBOCs to use their exper- 
tise to the benefit of the economy, the marketplace and international competitive- 
ness. 

The seven Regional Bell Operating Companies support provisions in 8. 1822 deal- 
ing with lifting the manufacturing restriction. 

Thank you. Senator Rollings, for your leadership on this issue and the oppor- 
tunity to testify. I'd be glad to try to answer any questions members of the commit- 
tee might have. 

Senator Robe. Thank you, Mr. McCormick. 

Next in order of the way they are listed on the panel is Mr. Jack 
McKinnon, who is transmission systems vice president of AT&T. 
Mr. McKinnon, good morning. 

STATEMENT OF JACK McKINNON, TRANSMISSION SYSTEMS 

VICE PRESIDENT, AT&T 

Mr. McKinnon. Grood morning. Mr. Chairman, and members of 
the committee, my name is Jack McKinnon and I am transmission 
systems vice president for AT&T. I am also the general manager 
of AT&T Network Systems' Merrimac Valley plant in North Ando- 
ver, MA. It is a distinct honor to speak to you at this hearing. I 



174 

commend you, Mr. Chairman, for your leadership in fashioning a 
comprehensive framework that will guide the development of our 
industry in the future. 

I have been asked to address the provisions of S. 1822 relating 
to the manufacture and provision of telecommunications equipment 
and customer premises equipment by the regional Bell operating 
companies, RBOC's. Before I do, Mr. Chairman, I want to bring vou 
good news from the U.S. telecommunications manufacturing indus- 
try. Since the breakup of the Bell system in 1984, and particularly 
since your committee last looked at the issue in 1991, we have 
made great process. 

Competition is robust. Innovation has soared. New products for 
both business customers and consumers have proliferated. Speed to 
market and benefits to consumers now characterize the industry. 
Indeed, the entire U.S. economy has been boosted by our industry. 
The 1993 the U.S. trade balance for all the telecommunications 
equipment moved into a surplus of $580 million. It was a deficit 
of $2.6 billion in 1988. And if you look at the high-end products 
only, like those we manufacture at Merrimac Valley, the trade sur- 
plus is a dramatic $3.7 billion. 

While statistics always seem cold, I can tell you that they become 
very real at our plant in North Andover. The transmission equip- 
ment we make is world class in every way; built by dedicated, high- 
skilled, high-wage American workers and shipped literally around 
the world. I am extremely proud to be associated with the AT&T 
men and women at Merrimac Valley, proud that we are winners 
of a 1992 Malcolm Baldrige Award recognizing our ongoing commit- 
ment to quality, proud of our very positive relationship with Locals 
1365 and 1366 of the Communication Workers of America, and 
proud that AT&T exports over 2 billion dollars' worth of products 
from our manufacturing plants every year. 

But, Mr. Chairman, it is not just big-ticket network and trans- 
mission equipment that is contributing to our Nation's economy 
today. At AT&T we have retooled our plants and retrained our 
workers to manufacture new terminal equipment that will soon be- 
come part of consumers' everyday lives. 

Here on the table in front of me is our lap-top computer, a fully 
portable and adaptable computer, word processor, and electronic 
mail access device made in South Carolina. This is our leading- 
edge home video phone next to it, incorporating compression tech- 
nology that permits video signals to be transmitted over a regular 
phone line, and manufactured in Louisiana. Here I have the latest 
also of AT&T's line of cellular phones. It is voice activated and rep- 
resents state-of-the-art technology, and is built in our plant in Ar- 
kansas where we used to produce teletype machines. 

What these products have in common is simply that they are 
American-made consumer products beginning to recapture a mar- 
ket that for too long has been the domain of the Far East. AT&T 
is pleased to be in the forefront of this return to global competitive- 
ness. The competitive manufacturing industry, in short, has re- 
sulted in clear benefits to consumers and to the Nation's economic 
well-being. 

Mr. Chairman, I certainly do not need to remind this distin- 
guished committee of the reasons for the breakup of the Bell Sys- 



175 

tern and the separation of monopoly local operations from the com- 
petitive parts of AT&T. So, let me state AT&T's views on RBOC 
manufacturing, and S. 1822 as clearly as J can. 

As long as the RBOC's maintain a monopoly control of the local 
exchange, which today is as rock solid as it was at divestiture, then 
they possess exactly the same ability and incentive to impede com- 
petition and manufacturing as they do in the long-distance market. 
They could harm competition in three ways. 

First, they could discriminate against competitors by providing 
their own manufacturing affiliate with preferential access to essen- 
tial engineering information. Second, an RBOC could subsidize the 
prices of equipment bought from its own affiliate with revenues 
from its monopoly telephone customers. Again, there is ample evi- 
dence that this kind of subsidy harms both manufacturing competi- 
tors and consumers, who ultimately bear the financial Durden of 
the subsidy through higher than necessary basic rates. Finally, to 
state the obvious, the RBOC's could simply favor their own manu- 
facturing affiliates for no reason or for any reason. 

Come to my loading dock in North Andover and you will see that 
most of our shipments are to companies like Bell Atlantic, Pacific 
Telesis, and so on. Once the Bells were in manufacturing, there 
would be no obligation in the bill and there would be no competi- 
tive pressure to buy from anyone but themselves. 

The remedy is precisely the same for manufacturing as it is for 
long distance; the introduction of real competition in the local ex- 
change business. Once that occurs, Mr. Chairman, and only when 
it occurs, should RBOC's be allowed into manufacturing. The bill 
S. 1822 properly maintains this vital protection for long distance, 
and we urge you to extend the same protection to the manufactur- 
ing sector. 

Mr, Chairman, AT&T is grateful for your leadership in develop- 
ing legislation to bring our Nation a fully competitive telecommuni- 
cations industry. With the adjustments described in my testimony, 
we would look forward as manufacturers to being supporters of S. 
1822, Thank you and we look forward to working with you as the 
legislative process moves ahead. 

[The prepared statement of Mr. McKinnon follows:] 

Prepared Statement of Jack F. McKinnon 

Mr. Chairman and members of the Committee: my name is Jack McKinnon. I am 
Transmission Systems Vice President of AT&T. I manage AT&T's largest manufac- 
turing facility, our transmission equipment plant in North Andover, Massachusetts, 
which employs over 6,500 people. AT&T greatly appreciates the opportunity to ad- 
dress the provisions of S. 1822 relating to the manufacture and provision of tele- 
communications equipment and customer premises equipment by tne Regional Bell 
Operating Companies ("RBOCs"). Mr. Chairman, AT&T recognizes that the tele- 
conununications and information industry in this country is evolving rapidly toward 
a new "National Information Infrastructure," and that with this change will come 
many changes in the telecommunications industry. We applaud your eiforts to cre- 
ate a comprehensive regulatory framework that will govern and shape the industry 
in the future. 

Mr. Chairman, since your Committee last addressed the manufacturing issue in 
1991, our industry has made dramatic progress. New products for telecommuni- 
cations networks, business and consumer users have proliferated. Factory shipments 
of communications equipment have increased steadily each year, growing from $35 
billion in 1989 to $47 billion in 1993, according to Commerce Department figures. 
Innovation and the rapid introduction of new technology characterize the industry. 



176 

The U.S. trade balance has moved into a solid surplus in 1993 of $580 million 
for all telecommunications products, where there was a deficit in 1991. If you look 
at the "Tiigh end" products only, excluding "low end" consumer products such as tele- 
phone sets, facsimiles and answering machines, the trade surplus is a dramatic $3.7 
Dillion. I have attached charts to my testimony showing those Commerce Depart- 
ment figures. In short, the news from the U.S. telecommunications manufacturing 
industry is good. 

Although we are at the threshold of a new era in the industry, it must be remem- 
bered that some things today remain the same. Most fundamentally, it must be re- 
membered that, ten years after divestiture, the RBOCs still control local monopoly 
facilities and still can use their control of these essential local facilities to impede 
competition in other markets. One of those markets is telecommunications equip- 
ment manufacturing. Any legislation designed to create an appropriate marketplace 
structure for the teleconmiunications industry must take into account this incon- 
trovertible fact and all of its implications. 

S. 1822 correctly recognizes tnat the RBOCs' unique control of local facilities cre- 
ates the potential for anti-competitive conduct by them in the long distance services 
maritet, and thus establishes, m Subtitle D of Title IV, various guidelines and com- 
petitive tests for HBOC entry into that market. The guidelines established by S. 
1822 for RBOC entry into manufacturing, however, appear to underestimate signifi- 
cantly the extent to which RBOC manufacture of telecommunications equipment 
would pose an equally serious competitive threat for as long as the RBOC local mo- 
nopoly persists. This concern is made more serious by the lact that the RBOCs ac- 
count for well over three-<][uarters of all local telephone exchange eqpiipment pur- 
chased in this country. This means that firms that manufacture equipment wnich 
does not conform to RBOC specifications would have virtually no domestic market 
for their products. 

We urge you to consider a single, critical fact: the RBOCs possess precisely the 
same abuity and incentive to impede competition in the mancet for telecommuni- 
cations equipment £is they possess with respect to the market for long distance serv- 
ice. This basic principle has been recognized since divestiture split the old Bell Sys- 
tem between its local exchange businesses and its competitive long distance and 
manufacturing businesses on January 1, 1984, in accordance with the Modification 
of Final Judgment (or "Decree"). In addition to requiring divestiture, the Decree en- 
joined the KBOCs from providing interexchange service and manufacturing tele- 
communications equipment, in order to ensure that the divested RBOCs (ud not 
recreate the very combinations and controversies that divestiture was intended to 
end. As such, the line-of-business restrictions were, and are, a logical and necessary 
counterpart to divestiture — two sides of the same coin. 

The potential for RBOCs' affecting the market for telecommunications equipment 
is substantial and would be harmfiilto the nation's consumers and U.S. glooal com- 
petitiveness. As the Department of Justice alleged in the antitrust case resulting in 
the Decree, RBOCs could impede manufacturing and equipment competition in at 
least three ways. 

First, an RBOC could discriminate against competitors by providing its own man- 
ufacturing affiliate with preferential access to essential engineering information, 
such as technical data, compatibility standards, modernization plans, and other in- 
formation about the local exchanges — all of which is necessary for the design and 
manufacture of equipment to be sold to the RBOC. This might occur, for example, 
"[b]y setting technical or compatibility standards and by either not communicating 
these standards to the general trade or changing them in mid-stream," thereby giv- 
ing [its] affiliate[s] an insuperable "headstart" in designing equipment. See United 
States V. AT&T. 524 F. Supp. 1336, 1372 (D.D.C. 1981). While S. 1822 has provi- 
sions requiring disclosure of technical information to competing manufacturers, 
similar regulatory provisions proved wholly inadequate prior to divestiture. With a 
technical and information headstart, RBOC affiliates would be the only manufactur- 
ers able to bring to market quickly equipment meeting RBOC specifications and re- 
quirements, thus foreclosing competition from unaffiliated firms. 

Second, an RBOC could "Subsidize the prices of [its] equipment with the revenues 
from [its] monopoly services." See United States v. AT&T. 552 F. Supp. 131, 190 
(D.D.C. 1982). RBOCs could do this by, for example, allocating portions of product 
design and development expenses for telecommunications equipment to systems en- 
gineering and research functions performed by and for local exchanges — or by charg- 
ing themselves inflated prices for affiliates' equipment, and passing the costs to local 
service ratepayers. The result would be both narm to competition in manufacturing 
and inflated local rates for consumers. 

Third, an RBOC could simply favor its manufacturing affiliates, choosing to pur- 
chase its equipment even when better or less expensive alternatives are available. 



177 

The RBOCs' control of local facilities and wide discretion purchasing matters would 
allow them to do this quite easily, to the detriment of competition and ratepayers 
alike. 

History proves that no scheme of regulatory safeguards and oversight has or ever 
can effectively police these incentives — let alone do so in time to permit meaningful 
corrective action for consumers or competing manufacturers. Regulators are ill- 
equipped to sort through complex questions of equipment life cycle costs, compatibil- 
ity requirements, qualitative features, or any of the other subjective factors that 
might he advanced by an HBOC to explain why its affiliate's equipment was more 
desirable than lower-priced or better alternatives. Indeed, massive and detailed reg- 
ulatory scrutiny at the State and Federal levels was unable to address and resolve 
these issues even before divestiture. In the old Bell System, Western Electric sold 
its sister companies, the BOCs, virtually everything they needed. Today there are 
far fewer regulations and a far more complex and dynamic industry. 

The RBOCs' ability to use their control of local facilities and to impede competi- 
tion in these ways means that any RBOC entry into the equipment market must 
be closely scrutinized, and should not be permitted until such time as there is actual 
competition in the local exchange. The bill, S. 1822, properly maintains this vital 
protection for long distance. 

S. 1822, however, omits such a requirement for manufacturing. S. 1822 allows 
RBOCs, after only six months, to enter the manufacturing business fully even if 
they retain monopoly control of local telephone services. The bill permits the RBOCs 
to enter all aspects of this business. The Dill does not require the FCC or the Justice 
Department to make an explicit finding that competition will not be harmed. 

S. 1822 attempts to protect competition in manufacturing by authorizing the FCC 
to adopt a number of safeguards, including separate subsidiary requirements, rules 
governing access to network information, rules reqruiring general availability of 
equipment manufactured by RBOC affiliates, and other requirements. These safe- 
guards, while well-intentioned and necessary, are not a solution in and of them- 
selves. Nearly all of these safeguards were employed in some form or other prior 
to divestiture. As the antitrust cases against the old Bell System attest, these condi- 
tions did not eliminate concerns about anti-competitive behavior. Moreover, S. 1822 
provides no guarantee as to how these safeguards will be adopted or implemented 
by the FCC or that they will be effective in protecting competition in manufacturing. 

The only safeguard proven to work against the threat posed by RBOC control of 
local facilities is to create competition in the local exchanges. If local exchanges were 
competitive, RBOCs could not use their local facilities to impede competition in the 
equipment (or any other) market. RBOCs could not successfully favor afliliated 
manufacturers because competition in their local services business would force them 
to buy the best possible equipment at the lowest price. RBOCs could not cross-sub- 
sidize their equipment manufacturing because any improperly allocated cost could 
not be recovered from monopoly ratepayers. There would be no monopoly from 
which to cross-subsidize. And RBOCs could not purchase equipment of amliates at 
inflated prices because this would make their local (and other) services less cost- 
competitive. For these reasons alone, AT&T believes that the best approach is to 
create local exchange competition first, and then allow RBOCs to request entry into 
adjacent markets such as the manufacture of telecommunications equipment. 

S. 1822 also raises grave concerns about how RBOCs may act collectively once 
they have entered the equipment market. While S. 1822 imposes a prohibition 
against joint RBOC activities, the bill does not address current network engineering, 
planning, and administration functions that are performed jointly by RBOCs 
through Bellcore. This exclusive joint development, control of new technical stand- 
ards and service deployment plans — vital to the successful manufacture of equip- 
ment — would pose obvious risks to competition if the joint RBOC Bellcore partici- 
pants also were in the manufacturing business. For example, without appropriate 
restructuring, Bellcore could provide information concerning changes in network de- 
sign to the RBOCs and their afliliated manufacturers well before providing it to 
independent manufacturers. Similarly, the RBOCs through Bellcore could jointly de- 
velop network performance standards and testing procedures that discriminate in 
favor of RBOC equipment offerings and against the products of rival manufacturers. 

Other alliances that are now permitted by S. 1822 pose equally substantial com- 
petitive threats. S. 1822 does not, for example, prohibit an RBOC manufacturing af- 
filiate from forming an alliance or joint venture with, and receiving funding from, 
foreign based or owned companies that are either private monopolies or operate in 
home markets that do not offer U.S. firms equivalent opportunities to sell tele- 
communications equipment. As recent economic history has taught, a foreign firm 
with access to or strong ties to monofX)ly local profits has an unfair advantage in 
competitive U.S. maricets, such as the telecommunications equipment market. Fur- 



178 

ther, because U.S. telecommunications companies do not have equal opportunities 
to these foreign markets, their ability to mount a competitive response is severely 
limited. Domestic content requirements do not and cannot resolve this issue, be- 
cause they would allow and encourage a foreign country to erect more barriers to 
U.S. products. A foreign owned company could use its ofF-shore advantage in the 
U.S. equipment market as long as the foreign company's equipment is assembled 
in part in the U.S. Real success in the telecommunications industry will in the fu- 
ture depend primarily on the ability to design and develop high-end hardware and 
software. As discussed earlier this is a market segment where the U.S. currently 
has a significant trade surplus. Merely having the opportunity to assemble or fab- 
ricate those products will not ensure a U.S. manufacturing industry that is competi- 
tive in world markets. S. 1822, as written, could bring a competitive imbalance that 
could have severe long-term consequences for the U.S. telecommunications industry. 
In closing, AT&T again commends your efforts, Mr. Chairman, to craft legislation 
that secures for the country the benefit of the full development and evolution of a 
competitive teleconununications industry. We look forward to working with you and 
other members of the Congress on these issues as the legislative process moves for- 
ward. 



U.S. TELECOMMUNICATIONS EQUIPMENT TRADE BALANCE 




1990 



1991 



1992 





XESJ^idiMMQ^- 



L495UH 




,1 a-'K7'U 



12 tf<^^M 



Years 
Data Source: Department of Commerce, Office of Telecommunications 



179 



4.0 
3.5 
3.0 
2.5 



(0 

i 2.0 



to Mi — 



iA 



1.5 



1.0 



0.5 — 




-0.5 






iirfli i ^31 irorai 



m 



J# 12 









LSS'S^'JQOH "^ 





1990 



1992 




Years 

Data Source: Department of Commerce, Office of Telecommunicatloos 

Excludes "low end" consumer products (telephone sets, facsimiles, and answering 

machines). 

Senator Robb. Thank you, Mr. McKinnon. We will certainly ap- 
prise the chairman of the committee of your kind words toward his 
efforts in this regard. 

Next on our list is Mr. Salim Bhatia, who is president and chief 
executive officer of BroadBand Technologies, Inc. Mr. Bhatia, we 
would be very pleased to hear from you now, sir. 

STATEMENT OF SALIM AX. BHATIA, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, BROADBAND TECHNOLOGIES, INC. 

Mr. Bhatia. Senator and members of the committee, thank you 
for the opportunity to testify before this committee. My name is 
Salim Bhatia and I am the president of BroadBand Technologies, 
Inc. We are a startup high-technology company located in Research 
Triangle Park, NC. We were founded in 1988 by a group of present 
BroadBand Technologies officers and employees, including myself. 

We founded BroadBand Technologies with the vision of building 
a world-class company, a company that would play a vital role in 
the transformation of the Nation's copper-based local telecommuni- 
cations network into an advanced interactive superhighway that 
would bring the power of switching of digital, and of fiberoptic 
transmission to all Americans. 

BroadBand Technologies is honored to be invited to testify at this 
hearing and to be in the company of such distinguished witnesses 
representing multibillion dollar companies. We are pleased that 
with S. 1822 the committee is taking action on so many of the is- 
sues that hinder the development of an advanced information su- 
perhighway. In particular, the MFJ manufacturing restriction un- 
dermines the ability of small telecommunications manufacturing 
companies such as BroadBand Technologies to do business with the 



180 



Bell companies. I believe it stifles the rapid deployment of ad- 
vanced network technology that is so critical to the long-term de- 
velopment of the national information infrastructure. 

BroadBand Technologies is not alone in its belief that this re- 
striction is counterproductive and inefficient. I have brought with 
me a list of nearly 200 telecommunications manufacturers that be- 
lieve it is important that the manufacturing restriction be lifted. 
These companies, of which we are one, employ more than 40,000 
U.S. workers. 

[The information referred to follows:] 

SMALL TELECOMMUNICATIONS MANUFACTURING COMPANIES WHO SUPPORT LEGISLA- 
TION ALLOWING BELL COMPANIES TO PARTICIPATE FULLY IN TELECOMMUNICATIONS 
MANUFACTURING PROCESS 



Eagle Telephonies, Inc. 

Urix Corp. 

Voice Control Systems 

PairGain Technologies, Inc. 

*Summa Four, Inc. 

International Light Inc. 

*Integrated Network Corp. 

Racon, Inc. 

*Adtran, Inc. 

Centigram Commun. Corp. 

Systematix Electronics 

AVQ Biddle Instruments 

Advanced Electronic Appl., Inc. 

Dianatek Corp. 

Everett Sound Machine Works, Inc. 

Applied Voice Tech. Inc. 

*Crest Industries, Inc. 

Meteor Communications Corp. 

ICOM America 

XTP Systems Inc. 

Olympic Controls Corp. 

Viking Electronics, Inc. 

*TeleSciences, Inc. 

*Superior TeleTec Cortelco 

International TeleService Corp. 

♦Teltrend Inc. 

Multipoint Networks 

*Silicon General, Inc. 

*Verilink Corp. 

Phone-TTY 

American Pipe & Plastics, Inc. 

Avtec, Inc. 

Communications Test Design 

Able Telecommunications, Inc. 

*Applied Digital Access, Inc. 

*Keptel, Inc. 

•Applied Innovation, Inc. 

Digital Systems Int'l Inc. 

♦EMAR, Inc. 

XY Resources Inc. 

HealthTech Services Corporation 

LC Technologies, Inc. 

•Microwave Networks Incorporated 

EIS Wire & Cable 

X-10, Inc. 

♦Telect 

*Seiscor Technologies, Inc. 

Ambox Incorporated 

Bejed, Inc. 

Restor Industries, Inc. 



Accurate Electronics, Inc. 

AmPro Corporation 

Lumisys 

*BroadBand Technologies, Inc. 

The Triangle Tool Group, Inc. 

♦Elcotel, Inc. 

BI, Inc. 

Vicorp Interactive Systems, Inc. 

Lemout & Hauspie Spch. Prd., Inc. 

Axes Technologies Inc. 

*Teradyne, Inc. 

*XEL Communications, Inc. 

TeleSensory Systems, Inc. 

Aptek Technologies, Inc. 

Electronic Modiiles, Inc. 

Network General Corp. 

*Brite Voice Systems, Inc. 

Taesung Industries 

Melita International 

*Intelect, Corp. 

*Senior Technologies, Inc. 

Quest Electronics 

Young Design, Inc. 

Jon/Beau, Inc. 

Information Transfer, Inc. 

International Telesystems Corp. 

Accu-Com, Inc. 

H & L Instruments 

Inovonics, Inc. 

VSI Telecommunications, Inc. 

California Amplifier, Inc. 

Pacific West Electronics 

Sequoia Electronics 

Solonics, Inc. 

Remarque Mfg. Corp. 

Perception Technology Corporation 

MAR Associates 

Chromatic Technologies, Inc. 

*Artel Communications Corporation 

OK Champion Corporation 

Easi File Corp. 

Greenbriar Products, Inc., (Orbitron 

Div.) 
Senecom Computer Company, Inc. 
*Senior Industries, Inc. 
Oza Communications Corp. 
*Larus Corporation 
AML, Inc. 

*Innovative Data Technology 
♦Klein Tools, Inc. 



181 



Puleo Electronics, Inc. 

Pentagram Software Corp. 

*DSP Group Inc. 

OptiVideo Corporation 

RDL Inc. 

Metal-Flex Hosing Inc. 

Riser Bond Inc. 

Special Product Company 

Signal Transformer Co., Inc. 

*TEL Electronics, Inc. 

T T Technologies, Inc. 

Telemax Corp. 

*Tamaqua Cable Products Corp. 

Unifi Communications Corp. 

Microtech 

V Band Corporation 

Primaiy Access Corp. 

Reach Electronics, Inc. 

USA Corp. 

Shore Microsystems, Inc. 

Waveline, Inc. 

American Int'l Communications 

C. Sjoberg & Son Inc. 

TouchFax Information Systems, Inc. 

Rhetorex, Inc. 

Access Technology Association 

Health Care Keyboard Co., Inc. 

USA Video Corp. 



•Telecommunications Techniques Corp. 

Telebit Corp. 

Tennessee Telecom, Inc. 

Sound Technologies Corp. 

DeYoung Mfg., Inc. 

BekTel,Inc. 

American Microwave Corporation 

Lingo, Inc. 

Colcom, Inc. 

Lippincott Co. Inc. 

Ejgpeditor Systems, Inc. 

ABL Engineering Inc. 

Dynamote Corp. 

FOCS Inc. 

Fore System, Inc. 

Payphone Systems 

G.R. Associates 

DGM&S, Inc. 

American Reliance Inc. 

Keltronics Corporation 

Manhattan Electric Cable 

♦Tekelec 

Metric Systems Corp. 

Communitech, Inc. 

Electronic Info. Systems, Inc. 

A Q Systems, Inc. 

Micro Integrated Commun. Corp. 

Innovative Technology, Inc. 

Level One Communications, Inc. 

* Means member of TLA. 

Mr. Bhatia. Furthermore, I agree with the many telecommuni- 
cations manufacturers that have urged Congress to repeal the MFJ 
manufacturing restriction. Last month nearly 30 of these compa- 
nies' leaders wrote Chairmen Dingell and Brooks that the restric- 
tion stifles the growth of manufacturing companies by denying 
them access to substantial resources and expertise of their Bell 
company customers. Merely permitting research and development 
is not enough, however. Trie restriction must be lifted in its en- 
tirety or it will continue to stifle job development in this vital high 
technology sector. 

Let me explain in more detail why this is so important to us. As 
a company, we believe that we can be successful if we are focused 
on our customers' ultimate success. Right now, the manufacturing 
restriction thwarts us from having the normal customer supply re- 
lationship that is critical to developing quickly a product that truly 
meets customers' and consumers' needs. 

Over the years, the courts' interpretation of the manufacturing 
restriction has greatly inhibited independent telecommunications 
manufacturers from engaging in product development and innova- 
tion. As we approach our customers with new ideas, we do not nec- 
essarily know all the applications that will define the functionality 
of the network. Yet because of the manufacturing restriction. Bell 
companies are oflen hesitant to allow us to work with their engi- 
neers, those people who are the ones with the best knowledge of 
their network design and needs. 

There are enough technical challenges in trying to assure a 
world-class network design. We do not need to add to them the bur- 
den of unnecessary working restrictions. At a minimum, such re- 
strictions are wasteful and inefficient. At their worst, they affect 



182 

the capabilities of the network and the productivity of the nation 
as a whole. 

Research and development is not enough. It is also important 
that these companies, which are so active overseas, be allowed to 
participate more fully in their own domestic manufacturing mar- 
ket. Performing research and development, as well as the possibil- 
ity of profiting from fabricating their own products, would provide 
a powerful incentive to innovate. Without this incentive, I fear that 
we will not see as great a leap forward in our move toward a na- 
tional information infrastructure. 

These companies might find it easier to rely on existing solutions 
and technologies such as hybrid coaxial cable, rather than ventur- 
ing forward toward creating a truly open platform with interactive 
broadband networks such as those offered by BroadBand Tech- 
nologies. These companies risk their networks becoming obsolete, 
and we risk being left behind as a nation. 

We at BroadBand Technologies believe that lifting the manufac- 
turing restriction contributes to Congress' overall vision and inten- 
tion to promote investment in the information infrastructure and 
to build a world-class business environment for innovation and in- 
vestment in telecommunications. This one act would help 
BroadBand Technologies and other innovative telecommunications 
manufacturing companies unleash a tremendous creative and pro- 
ductive energy accessible to all Americans. This will promote eco- 
nomic growth and strength throughout our Nation. 

We can see no good reason for the continuation of the manufac- 
turing restriction and applaud the committee on its efforts here 
today. Thank you for your attention and consideration, and I would 
be happy to answer questions as appropriate. 

[The prepared statement of Mr. Bhatia follows:] 

Prepared Statement of Salim A.L. Bhatia 

Thank you for the opportunity to testify before this Committee. My name is Salim 
Bhatia, and I am the President of BroadBand Technologies, Inc. We are a start-up 
high technology company, located in Research Triangle Park, North Carolina. We 
were founded in 1988 by a group of present BroadBand Technologies officers and 
eniployees, including myself. 

Our mission at BroadBand Technologies is to supply telecommunications network 
operators with the systems reauired to transform tne local exchange carrier network 
to provide interactive switched distal broadband technology. We provide a key ena- 
bling technology for making the National Information Irmastructure accessible to 
all. The BroadBand TechnoIogies'Fiber Loop Access (FLX) system has been in&talled 
in trials and first office applications at several major telecommunications companies 
and is currently being deployed to serve consumers in New Jersey. 

BroadBand Technologies is honored to be invited to testify at this hearing, and 
to be in the company of such distinguished witnesses, including those representing 
multi-billion dollar companies. BroadBand Technologies is at a much earlier stage 
of our life cycle. While our technology is very widely respected, and considered to 
be highly promising, after five years of operation we are still-in a "start-up" mode, 
and have yet to turn a profit. 

I would like to share our story because I believe that the history of BroadBand 
Technologies represents a prime example of the bright horizons — but daunting ob- 
stacles — tnat confront American technologists who seek to contribute to this Com- 
mittee's vision of an "information superhignway" available to all Americans. 

We were bom as a company in 1988 by what was essentially an employee buy- 
out of the broadband-associated electronics research then underway at SIECOR. At 
that time, there was substantial question whether the United States would commit 
to wide deployment of broadband networks. The policy climate, including the Cable 
Act of 1984's ban on telephone company entry into video services, was decidedly un- 
certain and not conducive to short term investor confidence. SIECOR chose not to 



183 

continue this interactive broadband development woric, admittedly admirable in lab- 
oratory settings, given the protracted uncertainty of whether it would have a place 
in America's network of tomorrow. 

We essentially created BroadBand Technologies in an act of faith. 

Faith in a vision, that the Clinton Administration and this Committee are now 
promoting, that all Americans could be linked to the health care, educational and 
entertainment treasure troves of our Information Age via interactive broadband net- 
works. 

Faith in American policymakers, here in Congress and at the Federal Commu- 
nications Commission, that they would clear the outmoded regulatory roadblocks to 
deployment of this network. 

And, faith in ourselves and our ability to develop our good ideas into affordable 
products. 

We founded BroadBand Technologies with the vision of building a world class 
company that would play a vital role in the transformation of the nation's copper- 
based local telecommunications network into an advanced, interactive superhighway 
that would bring the power of switched digital optical fiber to all Americans. 

We supply the electronics hardware and software that switches and transmits 
voice, data and video technology over fiber optic lines to the curb. When we began, 
conventional wisdom declared that such technology would be expensive and, there- 
fore, only affordable to large corporations and institutions. In addition, even most 
industry pundits expected that the technology would not become available until the 
second half of the 1990's. We bet, however, that we could make the technology both 
affordable and available much sooner. And we did. In fact, we introduced the tech- 
nology in trials in July, 1991, only three short years after the company's inception. 

Where people believed it would take a centralized, complex, high-speed computer- 
ized switch to provide a ubiquitous interactive capability, costing hundreds of dol- 
lars per subscriber, the BroadBand Technologies team invented a way to distribute 
the switchine and to put this capability on an eight dollar chip that serves 8 to 24 
subscribers. We also aevised a way to carry out tnis function on an electronic mod- 
ule the size of two index cards, as opposed, to the initial estimate of a refrigerator- 
sized cargo box. 

We are pleased that with S. 1822 the Committee is taking action on so many of 
the issues that hinder telecommunications investment today. In particular, the MFJ 
manufacturing restriction undermines the ability of small telecommunications man- 
ufacturing companies, such as BroadBand Technologies, to do business with the Bell 
Companies, and I believe it stifies the rapid deployment of advanced network tech- 
nology that is so critical to the long-term development of the Nil. 

I am here today to address why I think it is important that the Bell Companies 
be given relief from the MFJ restriction on manufacturing, such as that defined in 
S. 1822. In the first place, I must mention that BroadBand Technologies is not alone 
in its belief that this restriction is counterproductive and inefficient. I have brought 
with me a list of nearly 200 telecommunications manufacturers that believe it is im- 
portant that the manufacturing restriction be lifted. These companies, of which we 
are one, employ more than 40,000 U.S. workers. 

Furthermore, I agree with the many telecommunications manufacturers that have 
urged Congress to repeal the MFJ manufacturing restriction. Last month, nearly 30 
of these companies' leaders wrote Chairmen Dingell and Brooks that the manufac- 
turing restriction "stifles the growth of manufacturing companies by denying them 
access to substantial resources and expertise of their Bell company customers." I 
agree with them and their conclusion that no public pwlicy is served by delaying the 
repeal of this provision. The immediate repeal of the manufacturing restriction is 
even more important now, given the U.S. Court of Appeals decision earlier this year 
denying U.S. telecommunications manufacturing companies yet another means to 
fund research and development. Merely permitting research and development is not 
enourfi — the restriction must be lifted in its entirety or it will continue to stifle job 
development in this vital high-tech sector. 

Let me explain in more detail why this is so important to us. As a company, we 
believe that we can be successful if we are focussed on our customers' ultimate suc- 
cess. Right now the manufacturing restriction thwarts us from having the normal 
customer/supplier relationship that is critical to developing quickly a product that 
truly meets customer needs. 

Over the years, the Court's interpretation of the manufacturing restriction has 
generally innibited independent teleconmiunications manufacturers from engaging 
in product development and innovation. As we approach our customers with new 
ideas, we don't necessarily know all the applications that will define the 
functionality of the network. Yet, because of the manufacturing restriction, Bell 



184 

Companies are often hesitant to allow us to work with their engineers, those with 
the best knowledge of their network design and needs. 

If we were deploying a broadband network for General Motors, you can be sure 
we would work closely with their engineers in defining their system requirements 
and adapting our technology to their specific needs. If our technology was of strate- 
gic importance to GM, it is likely that they would be closely involved with us emd 
that they would even share in the financial risk. But in our work with the Bell Com- 
panies, which are key engines in the Nil, the same level of customer interaction and 
innovative thinking is impossible. 

Examples abound of the waste that results from the manufacturing restriction. 
Companies such as BroadBand Technologies must deal with Bell Companies at 
arms-length while designing a new product for the telephone networic. A close cus- 
tomer/supplier relationship is the key to success in the development of any manufac- 
tured product — it is critical to the development of sophisticated telecommunications 
products. But you can't ask a Bell company engineer to participate in the product- 
development team. It would be illegal. Trying to address this problem by simply al- 
lowing research and development will leave a grey cloud over what is legal and 
what is illegal and will continue to suppress innovation and job growth. 

There are enough technical challenges in trying to assure a world class network 
design — we do not need to add to them the burden of unnecessary working restric- 
tions. At a minimum, such restrictions are wastefiil and inefficient. In their worst, 
they effect the capabilities of the network and the productivity of the nation as a 
whole. 

Technological excellence through innovation is critically important to competitive 
success in a sector of the market as technically sophisticated as telecommunications. 
Innovation leads to beneficial product development and network modernization that 
ultimately benefit consumers. The ubiquitous nature of the telephone network en- 
ables many of these benefits to be widely available. 

I have addressed how the manufacturing restriction hinders the effective develop- 
ment of a customer/supplier relationship, that is, when others manufacture products 
for the Bell Companies. However, it is also important that these companies, which 
are so active overseas, be allowed to participate in their own domestic manufactur- 
ing market. The possibility of profiting from their own products and networit devel- 
opments would provide a powerful incentive to innovate. Without this incentive, I 
fear that we will not see as great a leap forward in our move toward a National 
Information Infrastructure. These companies might find it easier to rely on existing 
solutions and technologies, such as hybrid coaxial cable, than to move toward a 
truly open platform and interactive, broadband networks, such as that offered by 
BroadBand Technologies. These companies risk their networks becoming obsolete 
and we risk being left behind as a nation. 

To sununarize and conclude, BroadBand Technologies agrees with the many inde- 
pendent telecommunications manufacturers that believe it is important that the 
manufacturing restriction be lifted. This restriction affects our relationship with our 
customers, and probably hinders the rate of technological development in the net- 
work. 

We at BroadBand Technologies believe that lifting the manufacturing restriction 
contributes to Congress's overall vision and intention to promote investment in the 
information infrastructure, and build a "world-class business environment" for inno- 
vation and investment in telecommunications. This one act could help BroadBand 
Technologies and other innovative telecommunications manufacturing companies 
unleash a tremendous creative and productive energy, accessible to all Americans. 
This will promote economic growth and strength throu^out our nation. 

We can see no good reason for the continuation of the manufacturing restriction, 
and applaud the Committee on its efforts here today. 

Thank you for your attention and consideration. I am happy to respond to any 
questions that you may have. 



185 

letter from chairmen and ceo's of telecommunications manufacturing 

companies 

February 7, 1994. 

Hon. John D. Dingell 

and 
Hon. Jack Brooks 
U.S. House of Representatives 
Washington. DC 20515-6216 

Re: H.R. 3626 

Dear Chairmen Dingell and Brooks: As chairmen or CEOs of telecommuni- 
cations manufacturing companies, we want to commend you for including a section 
in H.R. 3626 that would repeal the provision in the AT&T consent decree that bars 
any of the seven Regional Bell Operating Companies from any involvement in the 
telecommunications manufacturing process. 

We support the immediate repeal of the "no-manufacturing" provision from the 
decree because we believe it stifles the growth of manufacturing companies by deny- 
ing them access to substantial resources and expertise of their Bell company cus- 
tomers. A decision last month bv a U.S. appeals court illustrates this point dramati- 
cally. In its decision, the court held that the "no-manufacturing" provision prohibits 
a Bell company from entering an R&D funding contract with an independent manu- 
facturing company under which the Bell company would help fund a manufacturer's 
R&D to develop a new product in return for royalties on the sale of the product if 
the R&D effort is successful. The court's ruling effectively denies American manu- 
facturing companies with access to a significant amount of R&D financing. 

We can give many other illustrations of how barring involvement by Bell compa- 
nies in the manufacturing process hurts manufacturers. For example, prohibitmg 
Bell involvement in manufacturing means a manufacturer cannot enter into a joint 
venture with a Bell company to design a new product for the telephone network. 
Similarly, a manufacturer would be wasting its time by asking a Bell company cus- 
tomer to assign an engineering team to help the manufacturer design a new product 
in a way that will meet the Bell company's needs most efficiently, since Bell compa- 
nies may not lawfully provide such assistance. 

While we applaud inclusion in H.R. 3626 of a section that would repeal the "no- 
manufacturing^ provision from the AT&T decree, we note that the bill does not re- 
peal the provision until one year after the bill is enacted. We believe no public policy 
is served by delaying repeal of this provision, and we urge you to amend the bill 
in order to repeal the provision immeaiately upon enactment of the legislation. 
Thank you for considering our views. 
Sincerely, 

Bany Gorsun; Larry Green; Yo-Sung Cho; Anthony E. Scandora; George 

Sollman; Don C. Springer, Joseph M. Greenleaf; Richard K. Laird; 

Joseph A. Lahoud; Pete Knoerzer; Arthur W. Epley, III; Tracey L. 

Gray; Michael S. Klein; James E. Keith; Giles Barton; Jacquelyn M. 

Belliveau; Rex A. McWilliams; Robert J. Landman; Alfred W. Yakel; 

James B. Wood; William H. Combs, HI; J.R. Panholzer; Gordon Lee; 

Frank Tripi; Richard Riccoboni; Jan S. Pirrong; Peter P. Savage; 

Harry J. Saal; and Howard Oringer. 

Senator ROBB. Thank you, Mr. Bhatia. 

Finally on our first panel we have Mr. John Major, who is chair- 
man of the Telecommunications Industry Association and is also 
senior vice president and director, spectrum, standards, and soft- 
ware management, of Motorola. Mr. Major. 

STATEMENT OF JOHN MAJOR, CHAIRMAN, TELECOMMUNI- 
CATIONS INDUSTRY ASSOCIATION (TIA), SENIOR VICE 
PRESIDENT AND DIRECTOR, SPECTRUM, STANDARDS, AND 
SOFTWARE MANAGEMENT, MOTOROLA, INC. 

Mr. Major. Thank you, Mr. Chairman. 

TIA represents over 570 companies which provide the bulk of the 
physical plant and associated products used to build, maintain, and 
improve the U.S. telecommunications infrastructure. Also, imports 
are a rapidly increasing share of our business — exports, sorry. In 



186 

the time since this committee last addressed the MFJ manufactur- 
ing issue, U.S. manufacturers' performance in domestic and inter- 
national markets has improved substantially. 

Our industry's phenomenal success story is largely due to the 
structure created by the 1984 divestiture agp'eement. That more 
open, dynamic environment has led to significant growth, reduced 
prices, improved products, and increased innovation. It has bene- 
fited American business, consumers, and the U.S. economy as a 
whole. TIA members now employ 1 million U.S. workers. Industry 
shipments have risen to $37.9 billion in 1991 and $47.1 billion in 
1993. Despite continued trade barriers, the industry has converted 
trade deficits of $2.6 billion in 1988 and $.5 billion in 1991 to a 
1993 trade surplus of $580 million. In the strategically important 
area of network switching and other high-end equipment, the 1993 
surplus was $3.7 billion. 

This post-MFJ track record, these employees, and the growing 
success of U.S. industry abroad are important factors to keep in 
mind as you consider MFJ changes which will significantly alter 
the structure of this successful industry. We commend you, Mr. 
Chairman, for your continued leadership on telecommunications 
policy matters. Along with your cosponsors, you have introduced a 
bill, S. 1822, which is comprehensive and thoughtful, and in large 
measure we support the initiative. 

My written testimony details the important issues addressed in 
the bill and several suggestions for change. This morning I want 
to address one central issue, the appropriate framework for BOC 
entry into manufacturing. 

Like its sponsors, TIA supports the goal of S. 1822, namely "con- 
tinued economic growth and competitiveness of American indus- 
try." TIA supports 1822 with the modification outlined in my writ- 
ten statement, particularly the creation of a process in place to re- 
viewing manufacturing entry proposals and ensure that such entrv 
advances competition in our industry. Allowing immediate and full- 
scale entry is unlikely to achieve the bill's goals. Rather, the entry 
policy must recognize and address the continuing market power in- 
herent in the BOC's local exchange monopoly and the dem- 
onstrated ability of this monopoly to affect equipment procurement, 
pricing and design, in ways that could foreclose or limit competition 
in the equipment market. 

Prior to 1984, our industry was not robustly competitive. The 
company that controlled the exchange monopolies was able to set 
market terms and purchase most equipment from its affiliated 
manufacturers. Despite persistent regulatory efforts to control self- 
dealing and related abuses, the MFJ separation of manufacturing 
from monopoly local services and related procurement has been the 
only effective method. 

As in 1984, the BOC's today control over 99 percent of the traffic 
in 77 percent of the local exchanges. With increased interest in net- 
work modernization and multimedia capabilities, aggressive spend- 
ing plans have been announced for the balance of the decade. 
Those local exchange monopolies and massive equipment purchases 
give the BOC's enormous influence over the shape and competitive- 
ness of the market, the level of employment, and the pricing and 
design of equipment. 



187 

Clearly, the committee is aware of this potential for market 
power abuse, and the bill contains several important protections. 
First, S. 1822 eliminates within 2 years the remaining legal bar- 
riers to local exchange competition. We agree that the public and 
the BOC's will benefit from local exchange competition. Further, 
the bill creates a transition framework for allowing BOC entry into 
service markets as local competition grows. This transitional ap- 
proach strikes a critical balance between ensuring that the BOC's 
are not disadvantaged by market changes and ensuring that their 
local monopoly is unlikely to be used to harm competition in these 
adjacent markets. 

This approach should be applied to manufacturing to provide 
parity between S. 1822's treatment of manufacturing and its treat- 
ment of long distance and other services. The court record of pre- 
MFJ market behavior and the post-MFJ explosion in both markets 
shows that both the manufacturing and long distance businesses 
are vulnerable to abuses stemming from the same source, the local 
exchange monopoly. Accordingly, the mechanisms for removal of 
these restrictions should be similar. 

Similarly, TIA asks you to consider two changes to S. 1822. First, 
the legal carriers to competition in local services should be elimi- 
nated, as required by section 230, before a BOC is eligible to reen- 
ter manufacturing. Currently, manufacturing is the only MFJ line 
of business restriction which would be liftea before these barriers 
must be eliminated, and this could occur 18 to 24 months before 
competition is even permitted. Second, an entry review process for 
manufacturing similar to those for long distance and other services 
should be added. 

Any BOC entry prior to the emergence of real local competition 
most likely will be through mergers, acquisitions, and other eco- 
nomic alliances with selected manufacturers. Such patterns could 
result in major industry consolidation based on BOC spheres of in- 
fluence rather than on efficiency or other legitimate economic con- 
siderations. This would result in market foreclosure for all manu- 
facturers not able to willing so align themselves. 

Those most at risk are small businesses. While some would bene- 
fit from BOC alliances, others would find it increasingly difficult to 
obtain financing and otherwise stay in business. Many of these 
small businesses are among the most aggressive, efficient, and in- 
novative, and they are significant sources of new U.S. jobs. 

Parity for manufacturing through a review process would be the 
most effective mechanism to ensure, as a matter of communications 
policy, that BOC entry does not have unintended results. 

A review of the process also may be helpful internationally. U.S. 
negotiators are pressing for the elimination of preferred supplier 
arrangements between PTTs and selected manufacturers, pointing 
to the current U.S. market as a model. Despite S. 1822 provisions 
to discourage self-dealing and discrimination, a blanket reversal of 
the MFJ before effective local competition exists could give foreign 
governments a new argument for allowing closed procurement poli- 
cies to continue. The review mechanisms would add significantly to 
the bill's other provisions and it would mitigate that argument. 

Thank you for your time and attention. 

[The prepared statement of Mr. Major follows:] 



188 

Prepared Statement of John Major 

Mr. Chairman, Mr. Danforth, members of the Commerce Committee. Thank you 
for this opportunity to appear before the Committee. My name is John Major, and 
I am a Senior Vice President and Director of Spectrum, Standards, and Software 
Management at Motorola. In addition, I currently am serving as Chairman of the 
Board of Directors of the Telecommunications Industry Association (TIA). I am here 
today to convey to you TIA's views concerning the manufacturing-related provisions 
of S. 1822, the Communications Act of 1994. 

The Telecommunications Industry Association (TIA) is a full-service trade associa- 
tion representing more than 570 companies engaged in the manufacture and supply 
of a broad range of telecommunications equipment and related products and serv- 
ices. TIA members provide the bulk of the physical plant and associated products 
used to build, maintain, and improve the telecommunications infrastructure in the 
United States. In addition. Motorola and other TIA members are involved on an 
ever-increasing basis in supplying telecommunications equipment and services in 
other developed and developing nations around the world. 

While TIAs member companies include virtually all of the major domestic manu- 
facturers and suppliers of telecommunications equipment, small and mid-sized com- 
panies make up more than ninety percent of TLA's membership. In addition to its 
public policy activities, TIA is a cosponsor of SUPERCOMM, the premier annual 
trade snow in the telecommunications industry. TIA is also a major contributor to 
the development of industry standards that serve to facilitate trade and commerce 
in telecommunications products, and in this capacity is accredited by the American 
National Standards Institute. 

Collectively, TIA's member companies employ over a million Americans in facili- 
ties located throughout the Unitea States. My own company. Motorola, employs ap- 
proximately 67,000 U.S. workers, who are actively engaged in research, product de- 
sign and development, production, and other activities relating to the manufacture 
oitelecommunications network equipment and customer premises equipment (CPE) 
for sale within and, increasingly, outside the United States. 

INTRODUCTION 

In prior submissions to this Committee, TIA has described in detail the beneficial 
effects of the MFJ on the manufacturing sector of the telecommunications industry 
in the U.S., on consumers of telecommunications equipment and related services, 
and on the American economy as a whole. See e.g.. Testimony of Michael Birck, 
Chairman, Telecommunications Industry Association, Before the Subcommittee on 
Communications of the Committee on Commerce, Science and Transportation, 
S.HRG. 102-134 (Februaiy 28, 1991) at 103-110. As my predecessor, Mr. Birck, indi- 
cated in his testimony before the Subconmiittee on Communications in the last Con- 
gress: 

Since divestiture, equipment prices have declined — in many instances dra- 
matically — from pre-divestiture levels, the quality of products in all areas has 
been greatly enhanced, industry research and development expenditures have 
risen, many new competitors have entered the market, the efficiency and com- 
petitiveness of U.S. manufacturers has increased, and there has been a pro- 
liferation of new and improved telecommunications products and services. * ♦ ♦ 
A number of companies which did not even exist prior to divestiture have since 
emerged as viable competitors in U.S. equipment markets. ♦ ♦ * Price and non- 
price competition (with respect to items such as warranty protection, delivery 
schedules, and after-sales service) has been very intense. * * * The more com- 
petitive marketplace which has emerged under the MFJ continues to exert enor- 
mous downward pressure on prices, forcing manufacturers to make maximum 
effort to control costs for existing and newly-introduced products. * * * 
Id. at 104. In short, as Mr. Birck observed, the more open, dynamic environment 
created by the MFJ has yielded significant growth, reduced prices, and increased 
innovation throughout the domestic equipment industry, producing substantial ben- 
efits to American businesses, consumers, and the U.S. economy. 

Motorola's own experience since the divestiture provides a good illustration of the 
beneficial impact of the MFJ within the domestic telecommunications equipment in- 
dustry. Since the MFJ was implemented. Motorola has experienced a threefold in- 
crease in annual net sales revenue, from $5.5 billion in 1984 to $16.9 billion in 1993. 
Building on the progress it has achieved in developing and marketing state-of-the- 
art telecommunications products in the U.S., Motorola has expanded its efibrts to 
penetrate telecommunications markets outside the U.S. In 1993, Motorola's inter- 
national sales were over $10 billion, an increase of more than 500 percent over 1984 
sales. 



189 

Nor is Motorola's experience under the MFJ unicnie. The emergence of a more dy- 
namic, competitive equipment marketplace in the U.S. has forced all American man- 
ufacturers to become more efficient and innovative in meeting the needs of their 
customers and, as a result, we have become much better able to compete both do- 
mestically and in overseas markets. The dramatic improvement in the U.S. balance 
of trade in telecommunications equipment demonstrates the growing strength and 
vitality of the domestic telecommunications manufacturing sector. Indeed, since TIA 
was established in 1988, our balance of trade in this area has improved from a $2.1 
billion trade deficit to an overall trade surplus of $580 million for 1993. The statis- 
tics for more technologically-advanced, "^igh-end" equipment are especially positive, 
showing an increase from a $700 million surplus in 1989 to a $3.7 billion surplus 
in 1993. 

At present, the U.S. position in international trade in telecommunications equip- 
ment is stronger than it has been at any time since divestiture, and current trends 
indicate that continued improvement can be expected. For the years 1989-1993, ex- 
ports of telecommunications equipment increased by 90 percent, while imports of 
telecommunications equipment rose only 29 percent. 

To achieve this robust performance, the domestic telecommunications manufactur- 
ing industiT has had to overcome tariff and non-tariff trade barriers which limit the 
ability of Motorola and other American firms to compete in certain foreign markets. 
Our success supports the proposition advanced bv Michael Porter in his book The 
Competitive Advantage of Nations, that vigorous domestic rivalry serves to facilitate 
the creation and maintenance of "competitive advantage" in an industry. 

In light of the importance of the current open and competitive marketplace to our 
industry's continued success. Congress must be mindful tnat legislative replacement 
of the MFJ brings risks as well as opportunities. Therefore, TIA urges the Congress 
to act in a manner which preserves the efficiencies, the competitiveness, and the dy- 
namism of the domestic teleconununications equipment manufacturing industry 
which has emerged under the MFJ. S. 1822 is intended to promote "continued eco- 
nomic growth and the competitiveness of American industry," but the potential ex- 
ists for it to have the opposite effect in the area of telecommunications equipment 
manufacturing. 

I would like to commend you, Mr. Chairman, as well as Senator Danforth, Sen- 
ator Inouye, and the other members of the Committee, for your collective leadershio 
in fashioning a proposal which is comprehensive, thoughtful, and generally well-bal- 
anced. In this regard, TIA strongly supports the overall goals and many of the spe- 
cific provisions included in S. 1822. 

TIA believes that the Committee should recognize that removal of the MFJ manu- 
facturing restriction, at a time when the Bell Operating Companies ("Bell Compa- 
nies" or "BOCs") still retain monopoly control of the local exchange networic within 
their respective regions, would have significant adverse impacts on competition, in- 
novation, consumer welfare, domestic employment, and the competitiveness of the 
U.S. equipment industry in domestic and foreign telecommunications markets. 
These impacts must be addressed. 

In the balance of my testimony, I will highlight those aspects of the manufactur- 
ing provisions of S. 1822 which are of greatest concern to TiA's members and iden- 
tify several specific areas in which TIA believes changes can and should be made 
to ensure that the actual impact of this legislation is consistent with its stated ob- 
jectives and with the national interest. 

S. 1822 

In particular, TIA supports the pro-competitive policy approach embodied in Titles 
III and V of S. 1822, which provide for the removal of existing regulatory barriers 
to competition in the provision of local telephone and video distribution services. 

'TIA and its members strongly believe that in order to ensure that our nation's 
telecommunications infrastructure remains second-to none, it is essential that the 
United States develop and implement a national policy which promotes full and fair 
competition in the provision of all telecommunications services. In particular, TLA 
believes that competition in local telecommunications services (i.e., video, voice, 
data, and multimedia) will increase opportunities for all segments of the tele- 
communications industry, while simultaneously benefiting consumers of tele- 
communications services by producing lower prices, increased innovation, and a 
more diverse and efficient array of products, services, and service providers. In addi- 
tion, the emergence of meaningful competition in local telephony maritets will re- 
duce the potential for anticompetitive behavior by the regional Bell Operating Com- 
ganies in related telecommunications equipment and service maritets. At present, 
owever, while some degree of competition in local telephony has begun to develop, 



190 

as a result of policy initiatives by the Federal Communications Conrunission ("FCC" 
or "Commission") and some state regulatory bodies, legal/regulatory barriers con- 
tinue to significantly limit the ability of alternative providers to fully enter and com- 
pete on a lair and equal basis with the Bell Companies in the provision of local ex- 
change and exchange access services. 

In a well-conceived effort to promote competition in the local loop, Section 302 of 
S. 1822 would amend Title II of the Communications Act to include a new Section 
230, which among other things provides for the elimination of any state or local 
legal requirements which "prohibit or have the effect of prohibiting the ability of 
any entity to provide interstate or intrastate telecommunications services." TIA mlly 
supports the removal pursuant to proposed Section 230(a) of all such restrictions on 
entry by alternative providers into local telephone service markets, as well as the 
elimination of current restrictions on telephone company provision of video program- 
ming, pursuant to Section 501 of S. 1822, which is also intended to expedite the de- 
velopment of a fully competitive marketplace in local telecommunications. 

TITLE IV — BOC ENTRY INTO MANUFACTURING UNKAGE BETWEEN MFJ REFORM AND 
COMPETITION IN THE LOCAL EXCHANGE 

TIA supports inunediate relaxation and eventual removal of the manufacturing 
restriction contained in Section 11(DX2) of the Modification of Final Judgment 
("MFJ" or "Decree") once an open and competitive marketplace exists in local tele- 
communications services. In this regard, TIAls Board of Directors last year ap- 
proved a proposal which provides for removal of the restriction on a phased basis 
as competition develops in the local exchange. TIA's Board developed its proposal 
in an enort to present a well-balanced approach to resolving the issue of BOC entry 
into manufacturing, in a manner which recognizes the critical link between the cur- 
rent absence of meaningful competition in the BOCs' local exchange service maricets 
and the potential for anticompetitive behavior in adjacent telecommunications 
equipment and service markets, if the MFJ restrictions are lifted. A copy of the TIA 
Board's proposal is attached hereto. See Attachment A. 

S. 1822 implicitly acknowledges this linkage, by including provisions for removal 
of the remaining MFJ line-of-business restrictions as part of a comprehensive pack- 
age of reforms which includes a framework for opening the local exchange to mean- 
ingful competition. Moreover, in addressing BOC provision of "in-region interLATA 
services, S. 1822 explicitly links removal of the MFJ restriction to the implementa- 
tion of regulations designed to promote competition in the local loop, as well as a 
determination that there is "actual and demonstrable competition to the Bell Oper- 
ating Company's local exchange and exchange access services in each relevant area." 
See Section 481 [Proposed Section 235(cX2XB)-(C) of the Communications Act]. 
Similarly, Section 451 of S. 1822 defers BOC entry into the alarm monitoring serv- 
ices business for a significant period, thereby allowing competition in the local loop 
to develop and mature, barring the provision of such services by the BOCs for a pe- 
riod of at least six years following enactment. See Proposed Section 232(c). In addi- 
tion, other sections of S. 1822 expressly provide that the BOCs may not engage in 
the provision of interLATA telecommunications and alarm monitoring services un- 
less and until a finding is made that the standard set forth in Section VIII(C) of 
the Decree has been met, i.e., that there is "no substantial possibility" that the BOC 
could use its monopoly power in local exchange services to "impede competition" in 
the maricet it seeks to enter. See Section 481 [Proposed Section 235(c) (3)); Section 
451 [Proposed Section 232(c) (1)). 

However, in sharp contrast to the approach reflected in TIA's phased entry pro- 
posal and the framework adopted in S. 1822 for BOC entry into other related mar- 
kets, the provisions contained elsewhere in Title IV of S. 1822 which address BOC 
entry into manufacturing provide for complete removal of the MFJ restriction, with- 
out any assessment of the state of competition in local services or the extent to 
which the BOC retains the ability to use its monopoly control of the local exchange 
network to impede competition in telecommunications equipment markets. Indeed, 
Section 403 of S. 1822 would authorize the BOCs to engage in all facets of the tele- 
communications manufacturing business almost immediately (under proposed Sec- 
tion 231(i), the FCC is required to adopt implementing regulations within six 
months of enactment, with lull-scale BOC entry into manufacturing permitted as 
soon as the Commission's regulations take efTect) and at least 18 months before the 
legal barriers to competition in the local loop must be eliminated. 

The current lack of parity in the treatment of BOC entry into the long distance 
and manufacturing businesses is particularly anomalous and belies the common re- 
alities of these markets and the long-standing history of anti-competitive abuses 



191 

which led to the imposition of restrictions on BOC reentry into these businesses fol- 
lowing divestiture. 

TIA believes that allowing the BOCs to reenter the telecommunications manufac- 
turing business in this premature manner would be a mistake which could seriously 
and adversely affect the dynamism of the existing competitive marketplace. The sep- 
arate subsidiary and related "safeguards" are constructive and important. However, 
regulatory safeguards have historically proven ineffective in controlling anticompeti- 
tive behavior of the sort which gave rise to the MFJ restriction. They should not 
be relied upon as the primary mechanism for the continuation of a competitive mar- 
ketplace in manufacturing, while competition is still emerging in the BOCs' local ex- 
change service markets. 

IMPACT OF PREMATURE BOC ENTRY INTO MANUFACTURING 

Under the implementation schedule established in proposed Section 230, preemp- 
tion of state/local barriers to competition in local telephony may take as much as 
two years following enactment to complete. Moreover, even after remaining legal 
entry barriers are lifted and new unbundling and interconnection regulations are 
adopted and implemented, pursuant to Section 303 of S. 1822, it is likely to be sev- 
eral years or more before viable alternative providers of local exchange and ex- 
change access services emerge and become established throughout a BOCs local 
telephone service areas. 

In the meantime, so long as legal barriers to entry remain and a fully competitive 
marketplace for local services remains an eagerly-awaited promise rather than a re- 
ality, removal of the MFJ manufacturing restriction would invite a renewal of anti- 
competitive practices which would serve to undermine the more open, competitive 
marketplace and the stronger, more dynamic domestic manufacturing sector which 
has emerged under the MFJ. While the specific mechanisms through which a BOC 
might seek to advance the interests of an unaffiliated manufacturer at the expense 
of other competitors and consumers may differ in some respects from those used to 
favor an affiliated provider of interLATA services, the risks to competition in both 
of these adjacent markets remain both real and substantial, so long as the BOCs' 
retain their current dominant position in the provision of local exchange services. 

If the BOCs enter the manufacturing business prior to the emergence of competi- 
tion in the provision of local telecommunications services, they wul have both the 
incentive and the opportunity to engage in a wide range of behavior which would 
eliminate or reduce tne ability of established U.S. manufacturers and new entrants 
to compete on the merits of their respective products for sales of equipment to the 
BOCs and other customers. Such behavior could include biased procurement, dis- 
crimination in interconnection, preferential disclosure of information relating to the 
BOCs local exchange network and planned changes thereto, and cross-subsidiiation 
of manufacturing activities at the expense of monopoly ratepayers, (e.g., through in- 
flated transfer pricing and/or misallocations of R&D expenses or other manufactur- 
ing-related costs). Through self-dealing alone, and notwithstanding the effort in S. 
1822 to prevent such behavior, the BOCs would be in a position to use their enor- 
mous purchasing power to virtually eliminate true merits-based competition in 
broad segments of the equipment marketplace. A return to such foreclosed markets, 
as a result of such practices, which regulators have been unable to control in the 

f)ast, would deprive American consumers and the U.S. economy of the benefits (i.e., 
ower prices, increased efficiency and innovation) which a fully competitive tele- 
communications ec^uipment marketplace provides. 

Nor would allowmg immediate Bell Operating Company entry into manufacturing 
enhance the competitiveness of U.S. manufacturers in domestic or foreign markets. 
To the contrary, total removal of the MFJ restriction would place at risk the contin- 
ued leadership of the U.S. in the global marketplace for advanced networic switching 
equipment and other "high-end" telecommunications products. 

As industry analysts at the Commerce Department and in the private sector have 
observed, the most predictable effect of removal of the MFJ manufacturing prohibi- 
tion would be the formation of BOC joint ventures with foreign manufacturers in 
the strategically significant central office switch mariiet and potentially in other 
product areas as well. A 1990 Department of Labor staff study focusing on the 
central office switch market concluaed that 18,000-27,000 U.S. jobs could be lost as 
a result of BOC alliances with foreign switch manufacturers. In its report, the DOL 
staff further noted that its estimate of potential job losses focused solely on the pro- 
duction (i.e., fabrication) of equipment, and did not take into account potential ad- 
verse effects on employment in research and development functions, much of which 
might be transferred abroad as a result of BOC joint ventures with foreign compa- 
nies. 



192 

In addition, the formation of such alliances would inevitably result in a major 
shift in BOC purchases away from domestic manufacturers to the BOCs' foreign 
partners. As the discussion below indicates, the "domestic content" provisions in- 
cluded in S. 1822 do not preclude BOC alliances with foreign manufacturers, or 
eliminate the potential adverse effects of such ventures on the domestic manufactur- 
ing sector and domestic employment (particularly in the hi^-wage, high-skill R&D 
area). See discussion at 27-29, infra. 

Even if the BOCs did not align themselves with foreign interests, renewed fore- 
closure of domestic equipment markets would make it increasingly difficult for effi- 
cient U.S. manufacturers which are not allied with a BOC to obtain the investment 
capital and volume of production they need to comp)ete at home and abroad. To the 
extent that competition in domestic equipment markets is skewed in favor of BOC- 
affiliated manufacturers, which may be less efficient and less motivated to aggres- 
sively pursue opportunities to compete, the global competitiveness of U.S. industry 
will be further undermined. 

Indeed, the potential adverse impact of allowing premature BOC entry into manu- 
facturing is likely to be most pronounced for smaller manufacturers, the very group 
which the BOCs argue would benefit from removal of the MFJ restriction. Many of 
these firms have proven to be more aggressive, efficient, and innovative than their 
laiTger, more well-established rivals, and have grown to a point where they are mak- 
ing a significant contribution to their local economies, to domestic employment, and 
to the competitiveness of the U.S. in domestic and foreign equipment markets. 
Clearly, certain of these firms would be attractive acquisition targets for the BOCs, 
and would individually benefit from removal of the MFJ manufacturing prohibition. 
However, such mergers would not necessarily lead to gains in employment or eco- 
nomic growth. Manufacturers that are not so favored by BOC investment or that 
wish to retain their independence are apt to find it far more difficult to secure from 
other sources the financial support they need to survive, notwithstanding the fact 
that they may be as efficient, or more eflicient than their BOC-affiliated competi- 
tors. 

Finally, enactment of legislation which reverses current U.S. policy and permits 
the BOCs' monopoly telephone enterprises to reaffiliate with equipment manufactur- 
ers would likely hurt U.S. efforts to open foreign markets. It would put at risk the 
progress being made abroad to address trade barriers arising from the relationship 
between monopoly telephone service providers and particular local telecommuni- 
cations equipment manufacturers. These preferred sirpplier relationships typically 
present procurement and interconnection oostacles to U.S. manufacturers. With the 
success of the U.S. as a compelling example, governments are rethinking this rela- 
tionship, and a trend in favor of more competitive policies appears to be taking 
shape. Policies in S. 1822 should not send a contrary signal. 

TIA RECOMMENDATIONS 

In order to preserve the benefits of the more open, competitive marketplace and 
the stronger, more dynamic domestic manufacturing sector which has emerged 
under the MFJ, TIA urges the Committee to revise the proposed framework for BOC 
entry into manufacturing described in S. 1822 as introduced, to establish a more 
explicit Unk between removal of the MFJ manufacturing restriction and the develop- 
ment of competition in the BOCs' local exchange service markets. In addition, TIA 
believes that BOC entry into manufacturing should be permitted only after comple- 
tion of a review process similar to the procedures proposed elsewhere in Title FV 
with respect to BOC entry into other adjacent lines of business. TIA's specific rec- 
ommendations are described below. 

TIMING OF BOC ENTRY 

As the discussion above indicates, TIA believes that it is critical to maintain a 
linkage between the development of competition in the local loop and removal of the 
MFJ restrictions, which arose primarily due to the absence of competition in the 
provision of local telecommunications services. As pre- and post-divestiture experi- 
ence vividly demonstrates, even well-crafted regulatory safeguards cannot prevent 
the BOCs from engaging in self-dealing and other anti-competitive behavior, so long 
as they noaintain their dominant position in the local telephone service market with- 
in their respective regions. 

While toaay local exchange competition appears possible, even likely, it is still in 
a nascent state. Moreover, significant legal/regulatory barriers remain which impose 
substantial impediments to the emergence of vigorous competition in the local ex- 
change. By providing for the elimination of state and local laws which have the ef- 
fect of prohibiting such competition, S. 1822 takes an important step toward facili- 



193 

tating the emergence of meaningful marketplace constraints on the BOCs' ability to 
use their dominant position in local services to impede competition in related mar- 
kets. However, even if these legal barriers are lifted, it remains unclear whether 
and how quickly robust local exchange competition wUl develop. 

The provisions included in Sections 481 and 451 of S. 1822, addressing BOC par- 
ticipation in interLATA and alarm services markets, respectively, respond to this 
uncertainty by establishing conditions for BOC entry which by their terms or in 
practical effect defer BOC entry at least until existing legal barriers to conipetition 
in the local loop are eliminated, pursuant to proposed Section 230(a) of the Commu- 
nications Act. See discussion at 9-10, supra. Indeed, the conditions established in 
both of these sections would defer entry for some period of time even after the up 
to two-year period established for implementation of proposed Section 230(a) has 
ended. 

In the case of alarm services, entry cannot occur before the end of the six-year 
period specified in proposed Section 232(c). With respect to "in-region" interLATA 
services, a BOC may enter the market only upon a showing that local exchange and 
exchange access services comparable to those offered by the BOC are "available from 
at least one [unaffiliated] provider," ofTered "predominantly" over facilities not 
owned or controlled by the BOC, and "subscribea to by a significant number of per- 
sons in each relevant area." See Propwsed Section 235(cX2XC). 

Given the substantial risks to competition, consumers, domestic employment, and 
the competitiveness of the U.S. telecommunications manufacturing industry which 
would arise from a premature removal of the MFJ restriction, as described above, 
TIA believes it is entirely appropriate that full-scale BOC entry into the manufac- 
turing business should be similarly deferred for a reasonable period to allow some 
opportunity for meaningful competition to develop in the local exchange. While TIA 
acknowledges the difficulties inherent in any attempt to predict when a fully com- 
petitive marketplace in local services will be achieved, TIA strongly urges that BOC 
entry be deferred at least until the federal preemption and related local competition 
provisions contained in proposed Section 230 have been fully implemented. 

ENTRY PROCESS 

TIA also believes that it is entirely appropriate and indeed essential, if S. 1822 
is to have its intended effect, that a procedure be established for review of the com- 
petitive and other public policy issues arising from specific proposals for BOC entry 
into manufacturing. In TLA's view, such a review at a minimum should include the 
opportunity for comment by industry participants and other interested parties on 
BOC proposals to enter the manufacturing business, as well as a specific determina- 
tion on tne record that the proposal in question satisfies the competitive standard 
for removal of the restriction set forth in Section VIII(C) of the MFJ, i.e., that there 
is no substantial possibility that the BOC or its affiliates could use their market 
power in the provision of local exchange and exchange access services to impede 
competition in the prohibited equipment market(s) which the BOC seeks to enter. 

Proposed Sections 232 and 235 already provide for such a determination prior to 
BOC provision of alarm services or interLATA telecommunications services. With 
respect to alarm services, this finding is to be made by the Department of Justice, 
with authorization for BOC entry to be deferred by the FCC until such a finding 
is made by the Department. See Proposed Section 232(cKl)- In addition, before au- 
thorizing BOC entry, the FCC itself must conclude that BOC provision of alarm 
services is in the pubHc interest and that it "has the capability to effectively enforce 
any requirements, limitations, or conditions" imposed on the BOCs in the provision 
of such services. See Proposed Section 232(cX2). In the case of interLATA services, 
the Section VIII(C) determination would be made by the Commission, in consulta- 
tion with the Attorney General, "on the record after opportunity for a hearing in 
which the public has the opportunity to participate." See Proposed Section 235(c)(3). 

Since the Section VIII(C) standard is an antitrust-based standard which focuses 
on the competitive impact of allowing BOC entry, TIA believes that the determina- 
tion as to whether this standard has been met in the case of BOC manufacturing 
proposals would be most appropriately left to the Justice Department. However, in 
view of the additional public policy concerns raised by such proposals, TIA would 
not object to a procedure similar to that described in proposed Section 232(c), under 
which the FCC would make the final determination, based upon the Department's 
finding as to the competitive impact of the BOC proposal and the Commission's own 
assessment of the public interest and its ability to effectively enforce any conditions 
or limitations imposed on the BOCs in connection with their manufacturing activi- 
ties. TIA is in the process of developing draft legislative language establishing a pro- 
posed pre-entry review procedure and would be pleased to work with you, Mr. 



194 

Chairman, and your stafT in an effort to address concerns in this area in an appro- 
priate manner. 

COMPETITIVE SAFEAUARDS 

As I have indicated, TIA continues to believe that so long as the BOCs retain 
their dominant position in local telephone service markets, removal or substantial 
modification of the MFJ manufacturing restriction places at serious risk the benefits 
that have accrued to U.S. consumers and the American economy as a direct result 
of the more open, competitive, dynamic domestic equipment maricetplace which has 
emerged under the MFJ. No matter how well-craftied or well-intentioned they may 
be, regulatory mechanisms such as those described in Section 403 of S. 1822 can 
at best limit to some extent the ability of the BOCs to engage in anticompetitive 
cross-subsidization or discrimination; they do not eliminate the incentive of the 
BOCs to engage in such behavior. Further, regulatory oversight and ultimate correc- 
tion of abuses, as in the past, are likely to occur years after the harm to the com- 
petitive market has occurred. 

Virtually all of the regulatory devices included in S. 1822 as competitive safe- 
guards were employed in one form or another prior to divestiture. In the equipment 
procurement area alone, the FCC conducted a series of proceedings spanning several 
decades in a vain effort to ensure that independent suppliers were given full and 
fair opportunity to compete for sales to the BOCs. 

The dramatic shift in BOC purchasing patterns following divestiture vividly dem- 
onstrates the inability of federal and state regulators to prevent discrimination by 
the Bell System in favor of its affiliated equipment supplier. Post-divestiture behav- 
ior has been equally difficult to detect and deter. Revelations regarding NYNEX's 
massive cross-subsidization and discrimination in favor of its procurement subsidi- 
ary. Materiel Enterprises, over a four-year period following divestiture, and the 
record of non-compliance by various Bell Companies with the MFJ non-discrimina- 
tion provisions, the manufacturing prohibition, and other line of business restric- 
tions, provide further evidence that the risk of such behavior remains both real and 
substantial. Even where the FCC rules have been in place for ten years, as is the 
case with CPE and service unbundling rules, there have been continued efforts by 
the BOCs to avoid compliance with these rules, thereby compelling the FCC to un- 
dertake numerous investigations and enforcement actions. 

Even Eissuming that regulatory devices could, in theory, be an effective means of 
controlling potential abuses, the ability of regulators to enforce whatever rules 
might be adopted is extremely limited, particularly given current budgetary con- 
straints. It is clear that the FCC and state public utility commissions are already 
stretched to the limit in attempting to deal with their existing responsibilities. In 
the FCC's case, while the Commission recently received additional resources and 
personnel, these are already fully committed to other areas, most notably the ongo- 
ing effort to implement the FCC's new cable rate regulations and other require- 
ments of the 1992 Cable Act. 

TIA has previously expressed its specific concerns with regard to the adequacy of 
a number of the "safeguard" provisions which have been incorjwrated in proposed 
Section 231 of the Communications Act. Areas of continuing concern to TIA include 
the degree of integration permitted between a BOC and its manufacturing affiliate 
(e.g., the absence of a prohibition on shared facilities and personnel, particularly in 
the area of R&D) [Proposed Section 231(c) (2)]; the proposed information disclosure 
provisions, which do not include an affirmative requirement that the FCC establish 
regulations which ensure that all manufacturers are provided with ready and equal 
access to the information they need to compete with BOC-affiliated manufacturers 
[Proposed Section 231(d)]; and the proposed procurement provisions, which do not 
contain an explicit requirement that the BOCs' purchase the best product available 
or provide opportunities to independent manufacturers to sell their equipment 
which are equal (rather than "comparable") to those afforded to BOC-affiliated man- 
ufacturers [Proposed Section 231(e)]. Additional concerns relating to the "domestic 
content" provisions included in proposed Section 231(cX3) are described elsewhere 
in my testimony. 

In prior testimony concerning MFJ legislation, TIA has expressed particular con- 
cern with regard to Bellcore's continued involvement in product testing, standard- 
setting, and other activities which affect the ability of other manufacturers to en- 
gage on a fair and equal basis in the design, development, and fabrication of tele- 
communications products for use in or connection to the BOCs' local exchange net- 
works. While the conduct of these activities through an entity jointly -ownedoy the 
regional Bell Companies may be appropriate in the current environment, when the 
BOCs are not direct comj)etitors ol mdependent equipment manufacturers, the con- 



195 

tinuation of joint BOC activity in these areas could have very serious anticompeti- 
tive consequences once the BOCs are themselves permitted to enter the manufactur- 
ing business. 

As introduced, S. 1822 prohibits the BOCs and their afdliates from engaging in 
"manufacturing" activities "in conjunction with a Bell Operating Company not so af- 
filiated or any of its affiliates." See Section 403 of S. 1822, Proposed Section 231(a). 
However, the bill does not address the future status of BOC joint activity (through 
Bellcore or otherwise) in areas which directly affect competition in the telecommuni- 
cations manufacturing sector, but which do not fall within the definition of "manu- 
facturing" adopted by the District Court in administering the MFJ, which is incor- 
porated in Title IV of S. 1822. See Proposed Section 231(1X4). 

Accordingly, TIA urges the Committee to consider the inclusion of additional legis- 
lative language addressing this issue. In this regard, TIA would recommend that the 
structure and functions of Bellcore be reconfigured in a manner which provide the 
beneficial aspects of the enterprise, while avoiding the competitive risks posed by 
a continuation of Bellcore in its current form. In several areas of concern to manu- 
facturers (, standard setting), TIA believes that this can best be achieved by broad- 
ening participation in the activity in question to include all interested parties, in 
a manner consistent with the antitrust laws. TIA looks forward to working with 
you, Mr. C!haimian, and members of the Committee to see that concerns in this area 
are dealt with in an appropriate manner. 

DOMESTIC CONTENT PROVISION 

Earlier in mv testimony, I described the potential adverse impact which pre- 
mature removal of the MFJ manufacturing restriction could have on the global com- 
petitiveness of U.S. manufacturers. In particular, the formation of alliances between 
the BOCs and foreign-based telecommunications equipment manufacturers would 
pose a serious threat to continued U.S. leadership in tne design, development, and 
manufacture of network switching equipment and other "high-end" telecommuni- 
cations products. As the aforementioned 1990 Department of Labor study found, the 
formation of alliances of this sort could have a substantial adverse impact on domes- 
tic employment. 

As TIA has previously indicated, while the "domestic content" provision included 
in proposed Section 231(cX3) purports to address the potential adverse employment 
impact of eliminating the MFJ manufacturing restriction, the "protection" afforded 
by this provision to U.S. employment interests may be largely illusory. Moreover, 
this provision fails to address the potential negative impact of removing the MFJ 
manufacturing restriction on domestic R&D and on U.S. trade policy objectives. 

As an initial matter, it should be noted that S. 1822 includes a "grandfather" pro- 
vision which would permit the BOCs to manufacture telecommunications equipment 
outside the U.S., using foreign workers, components, and technology, for sale in 
overseas markets. See Proposed Section 231(j). In addition, the "safeguard" provi- 
sions included in S. 1822 would not preclude a BOC from entering into commercial 
arrangements with a foreign manufacturer which would allow the BOC to share in 
U.S. equipment sales revenues derived from the foreign supplier's fabrication and 
R&D activities, including revenue generated through the BOCs' own equipment pur- 
chases. In such circumstances, the BOC would have a clear incentive to favor its 
foreign partner's products over similar products manufactured by U.S. firms. Clear- 
ly, tne foreclosure of domestic manufacturers resulting from such arrangements 
could have a substantial adverse impact on their business and on their established 
work force. 

I also should note that the proposed "domestic content" provision contained in S. 
1822 exempts the BOCs' "manufacturing affiliates" use of intellectual property re- 
sulting from R&D activities conducted outside the U.S. See Proposed Section 
231(c)(3XF). This is a substantial "loophole." If enacted, it also would fiirther en- 
courage the formation of alliances between the RBOCs and foreign manufacturers, 
in which the foreign firm would develop a technology or product and license the re- 
sulting intellectual property to the BCJC's manufacturing affiliate. Under such ar- 
rangements, the BOC affiliate's role (and related domestic employment opportuni- 
ties) might well be limited to the final assembly of equipment for sale in tne U.S. 
The formation of alliances of this nature would allow foreign suppliers to increase 
their market share and profits at the expense of U.S. firms, and hand foreign manu- 
facturers a leading role in the evolution of technology critical to our nation's tele- 
communications infrastructure. 

One final area of substantial concern to TIA's members relates to the potential 
adverse impact which enactment of proposed Section 231(cX3) could have on the 
ability of the United States government to secure and maintain maritet access op- 



196 

portunities for U.S. manufacturers in telecommunications markets outside the U.S. 
As the Committee is no doubt aware, the Administration recently concluded that the 
local manufacturing and domestic content requirements contained in proposed Sec- 
tion 231(cX3) "would be viewed by our trading partners as inconsistent with U.S. 
obligations under the General Agreement on Tariffs and Trade [GATT] and the 
North American Free Trade Agreement [NAFTA]. * ♦ ♦" See Letter from Michael 
Kantor, United States Trade Representative, to the Honorable John D. Dingell, 
Chairman, Committee on Energy and Conmierce and Edward J. Markey, Chairman, 
Subcommittee on Telecommunications and Finance, U.S. House of Representatives 
(February 28, 1994) at 1. 

In addressing the impact which enactment of these provisions would have on U.S. 
trade negotiations, the USTR specifically observed that "both requirements would 
seriously jeopardize ongoing telecommunications negotiations with the European 
Union." Id. More generally, the USTR noted that: 

We have been pursuing in a number of multilateral fora, such as the GATT 
and the Organization for Economic Cooperation and Development, and on a bi- 
lateral basis, the opening of investment regimes to U.S. investors and of mar- 
kets for U.S. products and services, which are among the most competitive in 
the world. The stakes are enormous. As noted above with respect to procure- 
ment, we estimate the European public telecommunications market to be $20 
billion annually and the Japanese public market to be $10 billion. Our negotia- 
tions to open these markets, as well as others, are undercut by any action which 
closes the U.S. market to foreign products and which imposes restrictions on 
our investors. 

Id., Responses to Questions in February 15 Letter at 4. 

TIA, both on its own and in concert with this and previous Administrations, has 
devoted considerable resources to expand market access opportunities for American 
manufacturers of telecommunications equipment. As our dramatically improved bal- 
ance of trade in telecommunications equipment indicates, while a number of prob- 
lem areas remain, these efTorts have yielded considerable benefits to our domestic 
manufacturing industry and the U.S. economy. 

One of the reasons why our government has been able to open a number of pre- 
viously-closed foreign markets to U.S. products is that our own market has been 
open to all manufacturers' products. Enactment of legislation which includes provi- 
sions of the sort included in proposed Section 231(cX3) would threaten the trade op- 
portunities currently available to the 88 percent of TIA's members which do busi- 
ness internationally. Such action would place at risk the very real progress that has 
been achieved in recent years, by inviting intransigence on outstanding market ac- 
cess issues or retaliatory behavior on the part of our foreign trading partners. 

SUMMARY 

In short, TIA continues to have serious concerns with regard to the impact on 
competition and the competitiveness of our nation's telecommunications manufactur- 
ing sector, if the Bell Companies are permitted to enter the manufacturing business 
before meaningful competition emerges in the BOCs' local telephone service mar- 
kets. However, while TIA is concerned that in its current form S. 1822 does not pro- 
vide an adequate framework for managing BOC entry into manufacturing, TIA be- 
lieves that the basic elements of a more acceptable approach to removal of the MFJ 
manufacturing restriction can be found elsewhere within the legislation. Adoption 
of the modifications described above — a more explicit linkage of the manufacturing 
provisions contained in Title IV with the local competition provisions contained in 
Title HI, together with the adoption of a procedural framework for BOC entry into 
manufacturing which is more consistent with the approach taken with respect to the 
removal of constraints on BOC entry into other adjacent markets — would signifi- 
cantly improve S. 1822 and would greatly enhance the likelihood that the laudable 
goals of this legislation will be achieved. 

Before closing, I would again like to thank you, Mr. Chairman, and members of 
the Committee for your efforts to craft legislation which secures for our nation the 
substantial benefits which can only be realized through the development of full and 
fair competition throughout all sectors of the teleconmiunications industry. TIA 
looks forward to working with you and other members of Congress as the legislative 
process moves forward. I appreciate the opportunity to appear before the Commit- 
tee, and I would be pleased to answer any questions you may have. 



197 



ATTACHMENT A 



The Telecommunications Industry Association (TIA), which represents more than 
500 U.S telecommunications equipment manufacturers and suppliers, has histori- 
cally supported ftill, fair and open industry competition. TIA believes that competi- 
tion in the local telecommunications services market, i.e. voice, video, and data, will 
increase opportunities for all segments of the telecommunications industry and will 
also benefit the consumer. TIA further believes that such competition should be en- 
couraged and that the manufacturing restrictions on the RBOCs should be removed 
on a phased basis as that competition develojis. Accordingly, TIA proposes the fol- 
lowing phased approach for removal of the MFJ manufacturing restrictions: 

Phase 1: A Regional Bell Operating Company would be permitted to interact with 
and to fiand design and development by independent manufacturers of products and 
to receive an appropriate financial return, subject to safeguards and limitations de- 
signed to prevent anti-competitive cross-subsidization and discrimination. 

Phase 1 would be implemented immediately upon the existence of appropriate 
safeguards. 

Phase 2: A Regional Bell Operating Company would be permitted to engage in 

groduct design and development itself or through joint ventures with other (non- 
OC) firms, subject to appropriate safeguards and limitations, including a continued 
prohibition of RBOC involvement in the fabrication of telecommunications hardware 
and the writing of "software integral to hardware." 

Phase 2 would be implemented when local exchange competition has reached a 
specified level. 

Phase 3: A Regional Bell Operating Company would be permitted to participate 
in the facets of the manufacturing process, including fabrication and the writing of 
"software integral to hardware," subject to limitations imposed by antitrust laws in 
general and otner applicable federal/state statutes. 

Phase 3 would be implemented upon a determination that an open and competi- 
tive marketplace exists in local telecommunications services, based on some estab- 
lished objective standard supporting the conclusion that anti-competitive behavior 
is unlikely to occur. 

In advancing this foregoing proposal, TIA recognizes the need to define the 
threshold levels of competition which will result in progressive relaxation and re- 
moval of the MFJ manufacturing restriction. TIA desires to cooperate with all inter- 
ested parties in crafting this definition. 

Senator Robe. Thank you, Mr. Major. Senator McCain, would 
you like to make an opening statement? 

Senator McCain. No thank you, Mr. Chairman. 

Senator RoBB. Senator Mathews. 

Senator Mathews. I have no opening statement. 

Senator RoBB. OK. We will begin a round of questioning. I expect 
that the chairman of the full committee will come before too long. 

Mr. McCormick, I would like to begin with you, if I may. Some 
of the opponents of manufacturing relief assert that the U.S. trade 
deficit has increased significantly from 3 years ago when the manu- 
facturing bill first passed the Senate. Instead of a trade deficit of 
over $2 Dillion there is now a surplus. Is manufacturing relief for 
the RBOC's still necessary to help the U.S. trade deficit? 

Mr. McCoRMiCK Well, I am proud of what the representatives 
from AT&T and Motorola have said about American competitive- 
ness and where we are in the marketplace. One of the principles 
that both these companies represent by virtue of their Baldrige 
work is the principle of continuous improvement. And my view is 
that if we are free to innovate, to design, to work with manufactur- 
ers, that we can further improve that trade balance. And so accord- 
ingly, I say let us go forward, not backward, and freeing us helps 
go forward. 

Senator RoBB. We are making progress, but we can do even 
more. 

Mr. McCoRMiCK Absolutely. 



198 

Senator Robb. All right. The Dingell-Brooks bill in the House 
permits the RBOC's into manufacturing under different conditions 
than the Senate bill. With regard to the manufacturing provisions, 
which of the two bills do you prefer and why? 

Mr. McCoRMiCK Well, I have to be very careful here in view of 
Senator Rollings' great support in the past in this area. But there 
are three areas, since you asked, that I think could be improved. 

The first of these is the provision that would not allow a Bell 
company to work with another Bell company in a cooperative en- 
deavor. Let me just g^ve you an example. We do not prohibit IBM 
and Apple from getting together today, but we would prevent U.S. 
West and Pacific Telesis from cooperating. U.S. West and GTE 
could get together, but U.S. West and Ameritech could not get to- 
gether. U.S. West and AT&T or Motorola could get together, but 
U.S. West and Southwestern Bell could not. So, that is one area 
that I think deserves attention. 

The other one is the requirement that 10 percent of the equity 
of a venture be held by someone other than the regional Bell oper- 
ating company, and many of these areas that we are going to focus 
on are going to be single product kind of ideas. And that provision 
assumes that you are going to have a profit center for every prod- 
uct, which is highly unlikely. It is a cumbersome provision. I wish 
it was not there. 

And finally, today, the holding company of the regional Bell com- 
pany can raise debt on behalf of its affiliates, it can raise debt on 
behalf of the telephone company, it can raise debt on behalf of its 
wireless business and other ventures. And to have that restriction 
only on the manufacturing entity and not allow the holding com- 
pany to incur debt on behalf of all of its subsidiaries, I think is an- 
other restriction we would like to see changed. 

Thank you. 

Senator Robb. I will let the chairman know of the delicate way 
you approached that particular question. I know he will appreciate 
it. 

The RBOC's have argued that the manufacturing restriction dis- 
courages their investment in research and development, yet several 
of the RBOC's, of course, have constructed their own research and 
development facilities. Is lifting the restrictions necessary to pro- 
mote R&D? 

Mr. McCoRMiCK Well, we did cite the example in U.S. West 
where we had intended to build a facility that might have as many 
as 1,500 scientists and engineers. We have 600. I believe that if 
this restriction were lifted that by the end of this decade we truly 
would have 1,500 scientists and engineers employed. 

Beyond that, though, the Horton study that has been done indi- 
cates that there will be 221,000 jobs created in America if this re- 
striction were lifted. And in the U.S. West territory we translate 
that to about 27,000 jobs. So, my view is that there are some tre- 
mendous benefits from this freedom, and many areas where we 
have forgone opportunities because of the restriction. 

Senator RoBB. What would happen to Bellcore if each of the indi- 
vidual RBOC's are permitted to pursue this particular course of ac- 
tion? 



199 

Mr. McCoRMiCK There is a current study going on within 
Bellcore to look at its long-term future, whether it should remain 
as it is, whether it should be divested, or whether some other fu- 
ture should be planned for it. The study team is going to report out 
in May. I cannot predict what that might be, but increasingly I 
think we find it difficult to do things through Bellcore by virtue of 
the monopoly stigma that could be put on any activity with that 
large an organization. So, we are very careful about the work that 
goes on there. We are very interested in having it continue, the 
core process work of processes that existed prior to divestiture, and 
again, we are reassessing its future and I really cannot predict the 
outcome. 

Senator Robb. One final question before I move on to Mr. 
McKinnon here, if I may, and I would like each of the panelists to 
address this if they will. Senator Packwood made it quite clear that 
he has a particular view on the question of domestic content and 
a letter from the USTR was introduced into evidence for this par- 
ticular hearing. Would you comment on that letter and the position 
of your company with respect to that provision? 

Mr. McCoRMiCK Well, we support the domestic content provi- 
sions by virtue of the fact that they are contained in the bill and 
this is our avenue for freedom. We are troubled that this could pro- 
vide some conflict with GATT and NAFTA, and it is my hope, while 
I am not an expert in international trade iDy any means, that there 
could be some arrangement worked out where the bill would not 
be seen to be in conflict by Ambassador Kantor and Chairman Rol- 
lings. So, it is my hope that that can be worked. 

We can live with these provisions, from our point of view. If we 
cannot compete with domestic material we just will not go forward 
with a product and service. So, we will not create a situation where 
we are buying equipment that is too expensive or noncompetitive 
and therefore blocking out foreign opportunity. But I just hope that 
the conflict can be resolved. 

Senator Robb. Thank you, Mr. McCormick. 

Mr. McKinnon, AT&T, of course, is the largest manufacturer in 
the world. Why is AT&T particularly concerned about the entry of 
RBOC's into manufacturing? 

Mr. McKinnon. Well, I think it stems from the issue of lack of 
competition in the local exchange business. Right now, at my man- 
ufacturing location in Massachusetts we have increased our inter- 
national exports overseas dramatically. If the RBOC's do not have 
competition at the local level, the local exchange level, and joint 
venture or partner with anyone, from our point of view cross-subsi- 
dizing could exist. It is certainly a reasonable assumption that 'obey 
will buy from their own suppliers. 

Senator Robb. But if they have rules to prevent cross- subsidiza- 
tion, and if the have separate subsidiaries and cost allocation rules 
and other self-dealing rules, would that not satisfy your concern? 

Mr. McKinnon. I think those rules in the past have just proven 
not to be firm enough to ensure that that does take place, and in 
fact the very reason why we divested in 1984. So, I think until 
there is legitimacy at the local exchange with competition, I think 
then and only then would I as a manufacturer be convinced that 



200 

RBOC's would buy from the best supplier for quality, service, and 
price considerations. I think without that we would be at risk. 

Senator Robb. Mr. Bhatia with BroadBand and Northern 
Telecom and others do not object to the entry of others into manu- 
facturing. How do vou respond to the concern about small business 
and helping small Dusiness in this regard? 

Mr. McKlNNON. My basic view is that we should all compete on 
a level playing field, that the best operation or the best business 
should win. I think as long as there is tested — from my point of 
view — competition where improprieties cannot take place, then I 
am perfectly amenable to let everybody compete head to head and 
the best person win. But I think we need safeguards to make sure 
that that does take place. 

Senator Robb. Final comment, and then I will move on. With re- 
spect to the domestic content provision in Special Trade Represent- 
ative's letter. 

Mr. McKiNNON. OK. In regard to that, being a manufacturer my- 
self, we in the last 5 years have moved our business from about 
zero percent exports to now 20 percent of my jobs in North Ando- 
ver. Approximately 1,000 people out of 6,500 are working on prod- 
ucts that we export. That is a tremendous feat. I just cannot imag- 
ine how we can continue to grow that if we do indeed back a pro- 
posal that says some kind of domestic content. 

We are working very, very hard to get into places like Germany 
and France. Today, we are excluded. And to give them any kind of 
an argument that says that we are doing something in the bill 
when we are saying we want open markets for everyone is just not 
a good position. 

Senator Robb. Thank you, Mr. McKnnon. 

Senator Pressler. Thank you very much. 

Mr. McCormick, I ask you and anybody else that would like to 
respond to some of these points. As vou know, I represent a sparse- 
ly populated State with a lot of small cities, towns, and rural areas. 
I know you represent your company and your stockholders. I am 
sure you have to have the highest yield, and I understand that 
very much. 

I am very interested in research and where research is allocated. 
We just completed a debate on the Senate floor on this. In the Ju- 
diciary Committee we have just completed discussion of tort reform 
and the chilling effect litigation has on drug research. Most of the 
new drugs that have been developed in this country have been be- 
cause stockholders have been willing to make an investment for 5 
to 8 years and develop something. The subsidized systems of Eu- 
rope have produced almost no new drugs. 

You spoke of your research facility in Boulder, which I know has 
had to be cut back once or twice. I guess I am interested in expand- 
ing services and finding ways of providing better services in some 
of our smaller cities. 

By the way, we very much appreciate the new digital switch in 
Aberdeen, SD, and the fiber optic innovations that you have made 
between Pierre and Aberdeen. 

Where is your research allocated? Quite naturally, I suppose, to 
the suburbs and the larger population centers where your stock- 
holders are going to — where you are going to be able to get a high- 



201 

er yield. You need investors, and I understand that, so we are sort 
of coming at this from two opposite ends of the poles, I suppose. 
But where do you allocate your research and in what direction, and 
will this bill affect that in any way? 

Mr. McCoRMiCK I do not have a breakdown in terms of rural 
versus urban. It is all directed at the local exchange market, and 
those applications would satisfy both urban and rural issues. 

Just a couple of examples: Because of our research facility in 
Boulder, we have got a new trial for satellite delivery of local tele- 
phone service in Wyoming going right now, for example. That is 
one area where we have spent some money and work, and we have 
defined that the LATA boundary is not crossed by going up to this 
satellite and we are actually transmitting within the LATA. 

The other area is in an area we call "fixed wireless service," and 
I think this is probably of very keen interest, obviously, to AT&T 
and Motorola and others. But as a substitute for wire facilities, a 
chance to put in less extensive wireless facilities. We have got an 
idea on the table in India, and our hope is that we could use that 
application for held orders in the rural areas where we have not 
built facilities. 

So, all of our research would be in the local exchange area. It 
would be focused on applications that drive more usage on the net- 
work, be they rural or urban, and also applications that would en- 
hance the robustness of that network, and that is where we would 
be if we were free. They would be wireless, they would be switching 
applications, they would be outside plant design. 

We bury a lot of facilities in our territory. We have a lot of out- 
of-sight plant. They would be in the speech recognition area, they 
would be on such things as enabling ISDN in the network to work 
more robustly with good CPE or customer premise equipment. I 
think that would benefit rural areas as well as urban. 

Senator Pressler. Yes, well, if we could get this job done, if we 
could find a way to it. I do not have any statistics comparing the 
quality of digital switches or ISDN service in, let us say, the Dako- 
tas as compared to Minnesota or Washington. I guess those would 
probably be two of your more urban States although they still have 
a lot of small towns. Such a comparison would be interesting — or 
a comparison to a State like Connecticut. 

But is it, as a practical matter, too expensive? We talk about the 
information highway. Is it as a practical matter too expensive to 
extend that to all of our smaller cities? 

Mr. McCoRMlCK. Now, it is not too expensive. Senator. We have 
got some States that are 100-percent digital and 100-percent elec- 
tronic switching, if you will, that are rural in nature. And we can 
provide for each of our 14 States the status of that. But it certainly 
is not out of the question of economics. 

In fact, we are replacing offices at the rate of about three a day 
in our company today witn electronic switching offices, and many 
of these are very small. We have over 1,000 offices, exchanges in 
our company that are less than 500 lines. And so we are a heavy 
rural company, and this is a big focus area for us. 

Senator Pressler. Recently, the FBI Director was in to see me 
seeking legislation, in the Judiciary Committee so that they could 
wiretap into digital switches which they cannot always do. I guess 



202 

the old analog way of listening in was more efficient. Should we 
give the FBI the power to tap into future technologies? They feel 
that organized crime will be communicating with no way for the 
Grovemment to listen in. 

On the other hand, the civil libertarians say that this is more in- 
trusion upon the privacy of American citizens. But FBI Director 
Freeh is seeking legislation actively to ensure the FBI's ability to 
listen in to future digital technologies. 

Mr. McCoRMlCK. I met with Director Freeh about 2 weeks ago 
on that subject. It is a terrible dilemma for the FBI and other law 
enforcement agencies. When you think of the potentia.l for terror- 
ism and so forth that exists in this country, law enforcement does 
need access under court order and so forth, and a legal means to 
get access. 

There is not a problem today, as I see it, in getting that access. 
But as we look at the future technologies, nobody knows what that 
design might look like. And from an industry standpoint, I think 
all of the people sitting at this table would agree with me it is in 
our interests to work with the FBI in a workable solution to figure 
out a way that through legal process and legal means and a means 
whereby our civil rights are not violated that the FBI and other 
law enforcement agencies can do their work. 

So, we have got an industry task force working with the FBI to 
see technically how do we go about doing that. How do we retrofit 
our existing offices, and so forth, if that is necessary? What costs 
are involved? And frankly, right now we are in the process of how 
can we narrow the scope of what they have asked for to make it 
a little easier for the industry to comply. 

And then I think that the privacy considerations are those that 
I think probably you will take up and others will take up sepa- 
rately. 

Senator Pressler. Mr. McCormick, in regard to this legislation, 
as head of one of the great companies in America, do you feel a tug 
of war between getting return for investors and stockholders and 
obligations put on you by the State PUC's? Your area is in the 
most rural, sparsely populated area of all of the RBOC's. 

I suppose if you had Connecticut and Rhode Island it would be 
different. But do you feel a constant tug of war between — and you 
need to get investors — I can see that very much — and the desire to 
put money into more profitable areas than serving rural areas and 
small towns? 

Mr. McCormick There is a tug of war. Senator. I think you put 
your finger on it very nicely. We have looked at selling some rural 
exchanges because we felt like some of the smaller companies 
might best be able to serve some of those, as opposed to ourselves. 
And we constantly are balancing the shareholder with the cus- 
tomer with the employee and the regulatory oversight, to balance 
all of their interests and run a company, so that it does not advan- 
tage one versus the other. 

Senator Pressler. I have some more questions for the others, 
but I am told that my time is up on this round. 

Senator Robb. Thank you, Senator Pressler. 



203 

Before we call on Senator Packwood, who is next in our order, 
we have been joined by Senator Kerry, Senator Dorgan, Senator 
Hutchison, and Senator Bums. 

Senator Kerry, I think you had a statement. 

Senator Kerry. Mr. Chairman, I do not really have a statement. 
I just wanted to put on the record that I have a conflict on the 
floor. I have an amendment I have to go down to the floor for now, 
and another business meeting of the committee. But I did want to 
welcome Jack McKinnon here. I have read his testimony and I 
know he met with staff this morning. We certainly want to try to 
work on the concerns that he has expressed about the marketplace. 
And I look forward to working on this issue. 

I would like to ask, though, I take it the record will remain open 
so we can submit questions. 

Senator Robb. The record will remain open, and anv questions 
that you would Hke to submit will certainly be referred to the ap- 
propriate members of the panel. 

Senator Kerry. I thank the Chair. 

Senator RoBB. And we thank them. 

Senator Bums, did you have any opening statement you would 
like to make? 

OPENING STATEMENT OF SENATOR BURNS 

Senator Burns. Well, thank you, Mr. Chairman. I am sorrv I am 
late on this day of reconciliation here. The Day of the Irish. Any 
Irishmen around? 

I am listening to this part of this telecommunications industry 
debate more than really contributing a lot to it. I have a few ques- 
tions that I want to submit for the record for the next panel. 

But I just want to draw attention to the committee and our wit- 
nesses here today and our guests that I made a speech 4 years ago 
with regard to this subject. And I just went back and pulled it up, 
or one of my staff members did, and he said, you are not going to 
believe this. He said, at least you are pretty consistent; that our 
position is the same now as it was 4 years ago. And that is some- 
what unusual for me, the wav we get to flipflopping around in this 
town on certain issues. [Laugnter.] 

I said then I believe that it would be a mistake to examine any 
one of the line of business restrictions in isolation without analyz- 
ing the interrelationship and intertwined nature of line of business 
restrictions. And that, of course, included manufacturing, informa- 
tion services, and interchange services. And I think that is what we 
are talking about today as we talk about a new communications 
policy, on how we approach telecommunications. 

I would say that the people that serve my area out there, U.S. 
West, have been very forward looking and innovative about some 
of the things that they are doing out there. And, of course, it gives 
credence to the argument we made then and the argument that is 
being made now, very successfully so. I congratulate the chairman 
of the full committee and, of course, these folks moving this right 
along. 

So, I would defer and just have part of my statement be entered 
in the record and listen to this debate. I think that we are going 



204 

to learn quite a lot and that we are all really on the same wave- 
length when it comes to this information. 

[The prepared statement of Senator Burns follows:] 

Prepared Statement of Senator Burns 

(Given April 25, 1990) 

Thank you, Mr. Chairman. 

This hearing is important and timely. I congratulate you and our very distin- 
guished Committee Chairman — Senator Rollings — for moving forward to debate the 
effects of the MFJ line-of-business restrictions — in particular, the manufacturing 
prohibition. 

In addition to a full discussion and debate on the manufacturing restriction, it is 
my view that the Subcommittee should also address and examine tne MFJ informa- 
tion services restriction and, at least some aspects of, the interexchange prohibition. 

I believe that it would be a mistake to examine any one of the line-of-business 
restrictions in isolation without analysing the interrelationship and intertwined na- 
ture of all the line-of-business restrictions: manufacturing, information services and 
interexchange services. 

First, with regard to the manufacturing restriction, we must examine whether the 
manufacturing restriction is hurting small, medium and large American firms by 
blocking them from collaberating with the Bell Regional Holding Companies. 

Senator Rollings bill — S. 1981 — is a good starting point for debate. I have con- 
cerns, however, that S. 1981 does not go far enough because it would require a full 
separation of research, design and development activities from the knowledge and 
expertise base that resides in the Regional Rolding Companies. At first blusn, this 
appears to be inconsistent with the way truly effective research, design and develop- 
ment is done here in the U.S. and — too often with greater success — by foreign-based 
firms. 

I want to be sure that government policy does not impede American telecommuni- 
cations R&D investment. 

Second, with regard to the information services restriction, we should examine 
whether the Regional Rolding Companies would have an even greater incentive to 
undertake research and development if the information services restriction is modi- 
fied because they would be more likely to benefit from the fruits of those efforts. 

Third, Mr. Chairman, rural areas must not be left out of the developing "informa- 
tion age." In a state like Montana there will, for the foreseeable future, likely be 
fewer suppliers of information services than there are in more heavily populated 
areas, it is, therefore, essential that telephone companies in rural areas face a regu- 
latory environment at both the federal and state level that encourages — or at least 
does not discourage — provision of information services. Thus, we should undertake 
an examination oi whether some limited modification of the MFJ interexchange re- 
striction may be necessary. 

Finally, related to each of these three substantive restrictions, we should also ana- 
lyze the Jurisdictional question — that is, the question of whether Congress should 
reassert primary control over national communications policymaking. 

I look forward to the testimony from our distinguished witnesses. 

Thank you again Mr. Chairman. 

Senator Robe. Thank you, Senator Bums. Your entire statement 
will be included in the record. 

Senator Hutchison. 

Senator Hutchison. Thank you, Mr. Chairman. 

I appreciate so much your spending your time coming here. I just 
want to say that my overriding goal is to try to bring balance, as 
we are coming out of a monopolistic situation, as well as a fran- 
chise situation. I just think we have got to make sure that we open 
the markets. We all want to be competitive and we want to do it 
in a way that is fair to everyone concerned. 

That is quite a task in this particular area, but I am going to 
work very hard to make that happen. 

Thank you, Mr. Chairman. 

Senator RoBB. Thank you very much. Senator Hutchison. 



205 

At this time, I am going to ask Senator Dorgan if he would re- 
lieve me. I have got still a third appointment that I cannot hold 
off. And the chairman will be here shortly. 

Senator Dorgan, if you would take over, please. 

Senator Dorgan [presiding]. Senator Packwood. 

Senator Packwood. We have heard from Mr, McKinnon and Mr. 
McCormick on domestic content. Mr. Major, what is your position 
on it? 

Mr. Major. The TIA would very much like to see the domestic 
content provision removed. Our problem is primarily with the way 
it will be perceived in the international markets. A very big prior- 
ity in our industry is to export our technologies. Open markets, 
competitive markets around the world are critical, and especially 
so because our companies are able to compete successfully in the 
global market if they have an opportunity to compete successfully. 

Senator Packwood. OK. Do not tell me more than I want to 
know. I just wanted to know your position on it. [Laughter.] 

Senator Packwood. Mr. Bhatia. 

Mr. Bhatia. I do not think personally that it is important to us, 
on the domestic content, to have it. I think what is important is 
to get these restrictions removed. So, whatever the leadership of 
this committee feels can best achieve the end objective, we feel 
would be most helpful. 

Senator Packwood. I understand that. But if you had your 
druthers, what is your position or your association's position on the 
domestic content? Let us say you can have the manufacturing limi- 
tations removed with or without the domestic content, which would 
you prefer? 

Mr. Bhatia. As long as we can have the ability to be competitive. 
And being able to buy from whatever source that there is to buy, 
whether it be domestic or foreign, that is the ultimate in 
flexibility 

Senator Packwood. Whether or not you can buy? 

Mr. Bhatia. Whether or not we can buy competitively from what- 
ever source, whether it be domestic or overseas. 

Senator Packwood. Do I assume that means you would rather 
not have the domestic content provision in the bill? 

Mr. Bhatia. I think that would be OK. 

Senator Packwood. Now, Mr. McCormick, let me ask you, would 
you give me your answer again as to why you support this domestic 
content provision? 

Mr. McCormick I thought I sidestepped that quite well, Senator, 
earlier. [Laughter.] 

We want the freedom to be able to take our best minds and be 
able to translate that into the hardware and software that we 
think will fit as attachments to the network and in the network, 
and work with others. 

I think, in order to get that, it is in our interest, it is in the inter- 
est of the communications workers of America and the IBW to pro- 
mote as many American jobs as they can in that process. I want 
them. I want them in America. I want them in Oregon. I want 
them in North Dakota. And I want them wherever they can be. 

And I think it is felt that, with the provision, with the potential 
situation, that maybe some other American companies that manu- 



206 

facture here might give up some market share if we are allowed 
entry. Obviously, we do not want to lose those jobs overseas. So, 
I said we coula live with those restrictions. That if we could not 
compete through the domestic content provision, we would not go 
forward with the manufacturing of an item. 

It does not stop short — it stopped short from us being able to 
work with other manufacturers and receive royalties. I think that 
would be permitted. And I do not think there is a domestic content 
restriction on the royalty. 

Senator Packwood. Let me interrupt and rephrase it. We all un- 
derstand coalitions and alliances in this business. And I under- 
stand your desire to protect some of your allies. If you did not have 
to worry about a coalition and support from others for this bill, 
what would be your company's position on domestic content? 

Mr. McCoRMiCK I think we would support free and open mar- 
kets, and support the direction that the previous administration 
and this administration have been on, to try to open these markets 
and solve the disputes in Japan, as Motorola has done, and others. 

Senator Packwood. All right. Now, I want to go back to Mr. 
Bhatia. Mr. Bhatia, your company has yet to turn a profit. What 
are your gross sales? 

Mr. Bhatia. In 1993, we did $15 million. 

Senator Packwood. $15 million. 

Mr. Major, what are your gross sales? 

Mr. Major. Well, I represent the TIA, We have 1 million employ- 
ees actually. 

Senator Packwood. What about Motorola's? 

Mr. Major. Motorola did $17 billion in 1993. 

Senator Packwood. $17 billion. 

And, Mr. McKinnon, AT&T, on equipment, not on long distance, 
but where you would be competitive with these other people? 

Mr. McKinnon. About $17 billion. 

Senator Packwood. So, you and Motorola are about $17 billion. 
Mr. Bhatia is about $15 million. And yet, Mr. Bhatia is not afraid 
of letting Mr. McCormick and the other operating companies out 
from under the manufacturing restrictions. And he is an itsy-bitsy 
company. And the two of you are — and I do not quite understand 
why he is willing to run the risk of losing all this business overseas 
or having them do it themselves, but the two of you have some mis- 
givings. 

Mr. Major. The decision that TIA reached was not easy for the 
TIA. The TIA is made up of many, many small companies. Large 
companies are only a small piece of the TIA. What happened — ^for 
a small manufacturer, there is a tremendous carrot in working 
with the RBOC's. And this legislation would make that possible. 

Incidentally, this also makes possible acquisitions. So, there is a 
carrot in the sense that the stock values would go up in these small 
companies. 

There is another carrot in that many of these the RBOC's rep- 
resent the customers of these small companies. So, all the towing 
and all the pulling is that the TIA should support the RBOC posi- 
tion in this case. 

Why do we go against it? 



207 

Because whereas it may be good for individual companies, the 
board and a majority of our members think it is bad for the indus- 
try. The dynamic we are seeking is competitive markets — and the 
sooner we can get to that, the better. But to allow this before that 
happens could result in consolidation that could take us back to the 
kind of black phone era we were in, in the seventies. 

Senator Packwood. Mr. McKinnon. 

Mr. McKcsfNON. I think my position is still that I would welcome 
the RBOC's into manufacturing, as long as there was competition 
at the local exchange, so I know that they would buy from the best 
provider. 

Today, in my case, as I said, we have added about 20 percent to 
my workforce to export products. Five years ago, we did not export. 
Now, we are doing hundreds of millions of dollars. 

If an RBOC today did not have competition and aligned with a 
foreign supplier, we could be completely excluded from both mar- 
kets, both in the domestic and overseas. And I do not think we 
ought to "reward" U.S. workers with that kind of alternative until 
there is competition at the local exchange. 

Mr. McCoRMiCK Senator, if I may. 

Senator Packwood. Go ahead. 

Mr. McCoRMiCK I just have to jump in. Thirty-four of the 50 
States do not have rate of return regulation any more. The FCC 
does not have rate of return regulation any more. We start with 
zero position in this market. We do not start — we are not AT&T. 
We start with zero position as a manufacturer today. 

The presumption among all of this testimony is that somehow we 
are going to put low-function, high-cost equipment in our networks, 
because that is in the interest of our company. And, clearly, given 
the incentives, given the competition that is coming in this indus- 
try, that is the last thing we would do. 

I think there are 12 or 18 pages of provisions in this bill on man- 
ufacturing. And I cannot imagine a situation where we are going 
to pick the high-cost, low-function suppliers versus somebody else, 
because somehow that advantages ourselves. We do not have any 
incentive to do that. 

Senator Packwood. Again, let me translate and make sure I un- 
derstand. As long as you no longer have any rate of return, you 
cannot put in $1 million piece of garbage and go to the local PUC 
and say, "We bought this wonderful machine, please give us a 12- 
percent return on it." 

Mr. McCoRMiCK We have price cap regulation at the FCC which 
covers about one-third of our revenues. And, in our States, we have 
about 8 out of 14 that are on some sort of price regulation. 

Senator Packwood. So, it is not in your interest to buy an infe- 
rior piece of equipment that U.S. West might make, as opposed to 
a very good piece of equipment that Motorola might make? 

Mr. McCoRMlCK Our goal is to work with all manufacturers — 
hardware, software solutions — and get all of them competing vigor- 
ously, and drive down the cost of equipment that we would pur- 
chase. 

Senator Packwood. Now, last question, because Mr. Major re- 
ferred to it. And I know it was a fear in cable; that if we let you 
into cable, you would just buy up the cable companies. 



208 

Mr. Major, I do not think you are going to buy up Motorola, al- 
though I have noticed the phone companies getting into some im- 
mense prospective deals recently, that prooably involved more 
money than buying Motorola, would be my guess. Is the fear that 
you are not going to buy Motorola or AT&T, but the fear maybe 
is that you are going to buy Mr. Bhatia and his stockholders are 
going to do very well, and that you will sort of absorb all of these 
small manufacturers, but not the big ones? 

Mr. McCoRMiCK Are you addressing that to me. Senator? 

Senator Packwood. Whoever wants to answer it. 

Mr. Major. The fear is that we would create an opportunity for 
consolidation, and step back to the kind of telecommunications 
marketplace we had in the sixties and seventies. We know the cur- 
rent formula is working and that it is dynamic. And the answer is 
before us: drive the local loop to a competitive marketplace, and we 
would welcome the entry of the RBOC's into manufacturing. 

Mr. Bhatia. Senator Packwood, if I may. I think we are moti- 
vated by, how can we meet the ultimate consumer's requirements 
best? If we were working with, let us say. Federal Express on a 
broadband delivery information system, we would clearly work very 
closely with them. If it was strategic to them, we would expect that 
they would want to share in the risk and the innovation and the 
opportunity with them. 

So, we are driven very heavily. Particularly when you are a 
smaller company, you do need the access to the complete informa- 
tion that drives us to the end user in satisfaction of those needs. 

With regards to, what is the situation today versus 20 years ago? 
It is a dramatically different environment that we are in. There is 
not one monolithic telephone company throughout the country. 
There are seven regional Bell operating companies. It is a highly 
competitive world that is evolving out there. There are companies 
like ours that are moving fast with innovation. What we have is 
creativity that we can bring to bear. 

So, I think it is a lot different environment than existed at the 
time predivestiture. 

Senator Dorgan. Senator McCain will inquire. 

Senator McCain. Thank you, Mr. Chairman. 

I just want to state for the record that I support fair and open 
competition in every aspect. And I appreciate most parts of this 
bill. This bill encourages immediate Bell company entry into the 
manufacturing field, while forbidding the Bells from venturing into 
other competitive areas, such as long distance for some time. 

I am concerned that we are creating artificial barriers that push 
the Bells into one industry now while protecting others until later. 
I do not believe the Congress should be dictating where competition 
will and will not occur. We should be developing policy that pro- 
motes fair and open competition, not contrived competition. 

I and others are working on some legislation that would allow 
the Bells to compete in any area after demonstrating the local loop 
is open and meeting certain standards that could be established. I 
would like to, however, return to the domestic content aspect of 
this bill. 

And I am frankly astounded, after going through a long and pro- 
tracted and sometimes bitter debate on the North American Free 



209 

Trade Agreement. The Congress enacted its will, with the Presi- 
dent's support, that we would have free and open markets between 
ourselves and our trading partners both to the south and the north. 
The commendable and outstanding job that our trade negotiators 
achieved in the GATT rounds. 

And now, we find ourselves enacting into law the same kind of 
measures that we decry in other countries. I hope that the wit- 
nesses had a chance to see this letter from Mr. Kantor. Did the wit- 
nesses have a chance to see this? 

Basically, he says, in brief, we believe that the local manufactur- 
ing and local content requirements of section 403 would be viewed 
by our trading partners as inconsistent with existing U.S. obliga- 
tions under the General Agreement on Tariffs and Trade, and the 
North American Free Trade Agreement, and that both require- 
ments would seriously jeopardize ongoing telecommunications ne- 
gotiations with the European union. 

I am also a bit befuddled because our exports are increasing. We 
are getting a greater and greater share of the world market, espe- 
cially at the high-technology end of the telecommunications busi- 
ness. And so, we are risking giving our European friends and Asian 
friends an excuse to close their markets. 

So, it is frankly amazing to me that we would be, in all due re- 
spect, Mr. McCormick, protecting jobs. I would urge all of us to go 
back and read 'The Wealth of Nations." I just — excuse the tirade — 
but if we enact this into law, if I were one of our trading partners, 
boy, I would be looking for ways to keep our equipment out — the 
kind that Mr. Bhatia and other small business entrepreneurs in 
this country are creating so many jobs about. 

With that diatribe, I would like to hear responses from the wit- 
nesses, maybe beginning with you, Mr. Major. 

Mr. Major. We very much agree that the dynamic is to create 
open, competitive markets that U.S. companies have access to. We 
have the technology. We can compete and succeed in these mar- 
kets. We can drive a substantial favorable balance of trade. And 
the reality of the global situation is every excuse becomes a barrier 
and every detail becomes an opportunity for a foreign country to 
make this difficult. Despite it, we have made tremendous progress, 
and we continue to make progress. 

Entering excuses into the process at this stage would be a seri- 
ous mistake. 

Senator McCain. Mr. McKinnon. 

Mr. McKinnon. I could not agree more. Senator. That is exactly 
my position. We have demonstrated over the last 5 years that we 
have been able to increase our exports. I do not want to give coun- 
tries such as, for instance — I will be very blunt — France, Grermany, 
and places like that — any ammunition. 

Senator McCain. Which they are looking for; are they not? 

Mr. McKinnon. Absolutely. I mean, we cannot get into those 
markets. They do not want us there. And to give them an excuse 
would be just a ridiculous point of view. I want to grow our exports, 
as we are now. I want to continue to do so. 

Senator McCain. Mr. Bhatia, would you like to comment? Are 
you afraid? Do you believe that 40 percent of anything that you 
manufacture should be made in the United States by law? 



210 

Mr. Bhatia. What we believe in, what I believe in is enabling en- 
vironments, enabling environments that allow us to be successful 
in the best way to meet consumers' needs. On that basis, then, 
being able to have the full flexibility to buy and sell is in our inter- 
est. But, most important, it would be helpful to have an enabling 
environment created in our marketplace. 

Senator McCain. Thank you. 

Mr. McCormick. 

Mr. McCormick I would like to see the bill passed and the free- 
dom gained. And I would like to see a way for the administration 
and Congress not to give up what we have won at GATT and 
NAFTA. 

In this bill there is the provision that we can use intellectual 
property from overseas in the manufacturing domestically. I think 
that is a big plus. As I said before, we can live with these provi- 
sions. Because if we cannot compete, we will not go ahead with the 
manufacturing idea. And I guess I hope that the administration 
and Congress can strike a compromise here. 

Senator McCain. Well, I hope the President will veto the bill. I 
see the ripple effect of enormous consequences. And I would hope 
that everybody who wants to see this industry opened up in the 
fashion that we have near unanimous opinion on would recognize 
the retaliation that would quickly ensue, which would then, I 
think, dramatically decrease this effect. 

This graph shows how we, at the high -technology end, have dra- 
matically increased our trade surplus from, in 1988, from a $.1 bil- 
lion deficit to a $3.2 billion surplus. I think this proves that we can 
compete on a fair and level playing ground. 

And I believe this $3.2 billion in trade surplus probably rep- 
resents many thousands of American jobs. Is that true, Mr. Major, 
speaking for your industry? 

Mr. Major. I can guarantee it represents many thousands of 
American jobs. I happen to have brought with me the pager I 
carry, manufactured in Boynton Beach, FL, and sold worldwide. I 
brought with me the cellular phone I carry on a regular basis, 
manufactured in Libertyville, IL, and sold worldwide. 

Senator McCain. I carry one, too. 

Mr. Major. And we are proving every day that you can manufac- 
ture efficiently in the United States. The issue is getting access to 
the foreign markets. And this could be a very divisive point. 

Senator McCain. Well, I hope that you will urge the members of 
this committee to test out your next generation of phone that you 
have come out with. 

Thank you very much, Mr. Chairman. 

Senator Dorgan. Thank you, Senator McCain. 

Let me inquire briefly. Mr. Major, did I hear you say that we are 
prevented from going into some markets without an excuse for that 
prevention, and we should not give them an excuse for the preven- 
tion? Is that the context of your answer to Mr. McCain? 

Mr. Major. That is the context of my answer to Mr. McCain. 

Senator Dorgan. There is wide disagreement on trade policy, as 
the Senator from Arizona well knows. We had two votes in the 
House of Representatives yesterday, both of which I think ended 
with the notion that the domestic content provision would be kept 



211 

in on the House side. But I would just observe that we can, as you, 
Mr. Major, indicated, and should compete successfully in markets 
where we have access. 

It is awfully hard to compete where you have no access. And uni- 
lateral free trade has not been very advantageous for this country 
in a number of areas. But, let me go on to a couple of other issues. 

Mr. McCormick, I was interested in your fleeting reference to 
wireless technology, and also your reference to the potential of sell- 
ing some of your smaller excnanges, or the discussions you might 
have had about that. I represent a very small, sparsely populated 
part of the country. I guess it is a vast land expanse, but not many 
people live out there. There are towns of 300, counties with 900 
and 1,500 and 2,000 people. 

What do you see happening with respect to wireless out in our 
part of the country? I will come back to manufacturing. But, since 
you mentioned it, I wanted to talk about that just for a moment. 

Mr. McCormick Senator, I think, first of all, having lived in 
North Dakota for about 2V2 years, I understand the territory very 
well. I do think there are lots of applications that probably have 
not been leading edge because primarily it has been New York, Los 
Angeles in the focus of the opportunity. But we are in business 
right now with a proposal in front of the Indian Government for 
a fixed wireless service as a substitute for wired telephony in a 
home. I think there are only 7 million phones in all of India, for 
example. There is a great opportunity over there. 

And as I look at the held order problems we get involved in, in 
the wide open expanses of North Dakota as well as the mountain- 
ous area of Colorado, where we just do not have facilities waiting 
for customers to go out and live in these remote areas, this is a 
way for us to maybe provide a substitute for the wired service. 

My view is Motorola, AT&T, and others are looking at these ap- 
plications, and we are in discussions with other companies, as well. 

So, I think there are plenty of opportunities — satellite trans- 
mission to the rural areas. There are two direct broadcast satellite 
ventures that are going to begin offering service later this year, in 
addition to the ones that already exist. 

So, I think it is a good technology search to solve the rural issue. 
And I worry about the robustness of wireless versus wired. Cer- 
tainly, a fiber optic cable to your home or farm has so much capa- 
bility with it that it is probably a preferred solution. But it could 
be very expensive, and I think there may be some alternate solu- 
tions that are a wireless nature that could be a good interim step. 

Senator Dorgan. Thank you. Maybe we could talk about that at 
another time. I will follow up on it. 

But let me ask Mr. Major and Mr. McKinnon, you both represent 
corporate entities of significant economic strength. I mean, you are 
not exactly mom and pop, out there struggling to find a small mar- 
ket to serve. What is your worst fear about what Mr. McCormick 
and the Bells will do if they are allowed into manufacturing? 

Mr. Major, you suggested consolidation. Well, there has been an 
orgy of consolidation in the last year or two in the whole tele- 
communications industry. All you nave to do is pick up any paper 
at random and read about consolidation. 



212 

So, tell me what is your worst fear? And, if it is consolidation, 
tell me how that plays out in terms of competition in manufactur- 
ing? 

Mr. Major. The consolidation scenario that is perhaps the 
bleakest is what we saw before the MFJ, before the divestiture. 
You can visualize a situation where a very small number of affili- 
ated companies are supplying a very small number of companies 
that have substantial monopoly based income ooportunities. And 
instead of what is in fact a growing number of telecommunications 
companies, we could have a decreasing number. 

For the most part, you might guess that these companies would 
be a little less competitive on the global scale, because they would 
not be weaned on the marketplace the way the companies are 
today. And you might see a situation where we would lose exports. 
There would be fewer choices in the U.S. market. And, indeed, we 
can, if you think back to your distant past, there was a time when 
the only phone was a black phone. 

Senator Dorgan. So, you are saying that corporate marriages 
exist in which their new partner then is shaded just a bit on the 
competitive scale and gets the business that you are competing for, 
because they have got a home relationship now? Is that your worst 
fear, that increased consolidation represents decreased competition 
and, therefore, you are sort of out of the loop in terms of serving 
their needs? 

Mr. Major. That is our worst fear. It is not necessarily a unique- 
ly Motorola fear. Motorola is a very competitive company. It is a 
TIA fear. And you need only go to Germany, France, Canada, and 
Japan to find where that is the arrangement, and the result is less 
competition and the consumer gets less product. 

Senator Dorgan. Mr. McKinnon, is that your view? 

Mr. McKinnon. Yes. I would just add one thing to it. I mean, 
I could build a case for worst fear. Take an RBOC that has a joint 
venture, let us say, with Alcatel of France, Siemens in Germany, 
which are closed markets to U.S. suppliers today. We cannot get 
in there. They do not want us there. 

If that relationship were to exist without competition at the local 
exchange, we could be blocked out of two markets — that which we 
are trying to get into in Europe and that which we now serve in 
the United States. Because a preferred supplier would obviously 
have the inside track. 

Mr. McCoRMiCK Senator, I would like to jump in if I could. In 
Seattle, WA, today, 30 percent of our business revenues come from 
one-tenth of 1 percent of the land area in the whole State of Wash- 
ington. Seventy-six percent of the business revenues in the State 
of Washington come from less than 2 percent of the land area. 

There are five networks under construction in Seattle today. 
There are two satellite broadcasters. A cable company is preparing 
now to offer access to AT&T and other suppliers there, along with 
these other five networks. There are two wireless suppliers that do 
not have to have wired technology. And there are FCC plans to put 
in maybe as many as five more licenses. 

The potential is there for plenty of competition, and plenty of 
competition exists today. We have lost 40 percent of our short long- 
distance market share in the State of South Dakota. We have lost 



213 

20 percent of our market share in our other States. And it is a 
range of 20 to 40. 

The presumption that, given this environment, we would some- 
how pick high-cost, low-function equipment to benefit ourselves 
somehow and put that in our network so that we do not serve our 
customers as well as the next person is ludicrous given the envi- 
ronment that exists today. 

I think the context of these discussions takes place in the Bell 
System prior to 1982. And that is not the reality today. It has been 
12 years since that consent order was announced. And we come to 
this market with zero market share and zero incentive to put in 
high-cost, low-function equipment. 

I have real trouble with barkening back to the seventies and 
eighties as a presumption and as a predicate for how we should 
have this freedom. 

Senator Dorgan. Because I am not an expert in your business 
and do not understand your industry perhaps as well as some of 
my colleagues, because I have not served on this committee for a 
dozen years, the two arguments are really interesting. The argu- 
ment advanced by Mr. Major and Mr. McKinnon is that less com- 
petition is probably better. 

I mean, you talk about competition, but the fact is, if the Bells 
are not involved in manufacturing, you have less competition. Less 
competition is probably not better. 

And, yet, on the other hand, I understand the point, Mr. McCor- 
mick, that Mr. Major and Mr. McKinnon raise. We could conceiv- 
ably find a circumstance in which your companies find ways to 
shade business decisions toward the affiliations that you have and 
make it a less competitive environment. I think that is a real con- 
cern. 

So, this is something we are going to have to resolve as a matter 
of policy. And the question before this hearing today is, with the 
legislation that we have drafted and are now advancing, what 
kinds of provisions will advance the interest of competition, true 
competition in our country? 

I do not know that we are necessarily finding all the right an- 
swers. There may not be a right answer. But we have got to try 
to find out what precisely will advance the economic interests of 
the country and produce more competition so that the consumers 
have lower prices and a broader level of service. 

Thank you very much for your responses. 

Senator Mathews. 

Senator Mathews. Thank you, Mr. Chairman. Let me, if I could, 
begin with a statement which I made at our last hearing with re- 
gard to this subject, and one which I want to make out of convic- 
tions rather than there being any anger or being anything behind 
the statement. 

I said at our last hearing that I am becoming more convinced 
every day that the divestiture was a hoax; that what we wound up 
doing is taking a company that we had suspicious about, and that 
we were concerned as to whether or not the consumer was getting 
a fair break, because of the monopoly that was involved. And we 
broke it up into pieces, and we have spent all of time since then 
trying to protect the pieces. 



214 

Now, at some point, I guess I see my responsibility on this com- 
mittee as one of trying to level the plajang field; and, as Senator 
McCain alluded to — whether he said it directly or not, I am not 
sure — but, of our putting ourselves in a position where the market, 
rather than we as a Congp^ess or we as a Government, determines 
who provides what service. 

And, in answer to maybe Senator Packwood's question, and I 
want to go over that just a moment, if I could, in talking about the 
two types of companies that we are basically dealing with here 
today. Mr. McCormick, if Secretary of State, Mr. Christopher, ever 
decides on another line of work, I want to recommend you for that 
job, because I do not know that I have ever seen anyone who is as 
diplomatic at answering a question as you are. 

Mr. McCormick Thank you. Senator. I do not want his job. 
[Laughter.] 

Senator Mathews. Maybe the things I am going to say will not 
be as diplomatic, because I believe, if I understand your line, the 
RBOC's are saying, "Let us into the manufacturing business and 
let us into the long-distance business, because we have the capabil- 
ity of doing it; and perhaps our competition will make the cost 
overall to the consumer less." 

And AT&T is saying, "Well, we might or we will consider that. 
But we want to get into the local telephone exchange business, and 
we want to have some other opportunities here." 

And I agree with both of you. I think we ought to remove those 
restrictions. As long as we have cable TV going into practically 
every home in urban America — and that is where the battleground 
is; it is not out here in the rural areas, it is in urban America — 
as long as we have cable TV lines going into those, we have got 
the capability, it seems to me, of having competition. 

It is a matter of when we are going to step up and do it, and 
who is going to step up and do it. And I would have to suspect that 
if you people and your companies are as interested in seeing that 
that competition is there as you say you are, if we will get out of 
your way, you will level that playing field right fast, and you will 
let the consumers decide. 

As a preface to asking you to reply, in order that the American 
people might know that we are not exactly dealing with companies 
that are struggling to get on the big board, Mr. McCormick, do you 
have any idea what is the gross revenues of the regional Bell sys- 
tems? Do you have an estimate of that? 

Mr. McCormick It would be about $85 billion, collectively; and 
it would range from — I think we are one of the smaller compa- 
nies — about $10 billion, and it ranges up to about $17 or $18 bil- 
lion. 

Senator Mathews. Do you have a breakdown that is local serv- 
ice, versus others? 

Mr. McCormick I do not. Off the top of my head, I know that 
in our case, out of our $10 billion access to Sprint, MCI, AT&T, 
they are our customers, is about $2.8 billion of that; and so, it is 
roughly 28 percent short long-distance which we can be in — and I 
would prefer to use that term, rather than interLATA, 
intraLATA — but we can be in the short long-distance business, and 
that is about $1.4 billion. 



215 

So, that is about 14 percent of our revenues, and the bulk of the 
rest is made up of local service, with the exception of yellow pages 
and some equipment sales that we make. We sell other manuiac- 
turers' CPE to our end-user customer, and so I am guessing the 
local service component would be around 35 percent, maybe 40 per- 
cent, of our total revenues. 

Senator Mathews. Mr. McKinnon, on AT&T you indicated, I 
think, $17 billion from equipment operations. What is the total rev- 
enue? 

Mr. McKinnon. About $63 billion. Senator. 

Senator Mathews. About $63 billion? And so we are dealing with 
one company that has $63 billion, and a group of — how many 
RBOC's are there? 

Mr. McCoRMiCK There are seven. 

Senator Mathews. Seven that have $85 or $83 billion. And, how 
much of yours is domestic, versus overseas? 

Mr. McKinnon. I do not have those figures with me, Senator; I 
am primarily in the manufacturing business. But our chairman 
will be here Thursday, and I am sure he could provide that infor- 
mation. 

Senator Mathews. Well, I guess the point is, in asking you to 
comment on my premise, that — well, one of them — and there is one 
portion of this bill here that I would like to ask your advice on. I 
believe under 1822, in order for competition to be determined, it 
has to be done by FCC or some Federal agency. 

I would like to ask you, in terms of commenting on it, to look at 
it in terms of: Let us put the burden of proof on the complainer 
and, in whichever instance that it is, whether or not there is ade- 
quate Local competition. Instead of your having to prove it, AT&T 
or Motorola or whatever would have to disprove it. And let us do 
the same thing with respect to whether you go into the long-dis- 
tance and whether there is competition; put that on you, rather 
than on them. 

Reverse the way that we have it said in there now. Again, let the 
market determine whether or not there is adequate competition. 

With that sort of rambling background, do you believe we are at 
a point, both of you, that we can just take the harness off and let 
the animals graze in whichever pasture looks best? 

Mr. McCoRMiCK Senator, I would like to respond first. I know 
we are in grave disagreement in other — where we may disagree on 
manufacturing, I think there is more grave disagreement of other 
aspects of this bill — but I just want to paint a picture for you of 
what our company has been attempting to do. 

We have plans to build a vigorous, broadband, new technology 
overlay in region, because we know competition is coming and if we 
are there with twisted pair, with narrowband services, we are not 
going to compete. So we have a vigorous program under way to do 
that. 

At the same time, we made an investment in Time-Warner a 
year ago. We closed that investment in September. Right now, as 
we speak, we are in the process of building the enhanced network 
service in Orlando, FL. Currently, for Time-Warner to offer tele- 
phone service, long-distance service, enhanced services or electronic 



216 

publishing, as well as cable, as I read this legislation they would 
need four subsidiaries to compete with Bell South. 

I met with the chairman of Time-Warner and a large manufac- 
turer earlier this week. We discussed the problems in the Orlando 
trial with the top box and the underlying operating software. I can- 
not engage in those discussions or enter into that discussion of a 
design, or be any more than just saying, "That is not good enough," 
because we do not have a waiver approved that is sitting, as we 
speak, at the Justice Department, because we have got vigorous op- 
position from the parties that are opposed to us being in this busi- 
ness. 

We start in the long-distance business with zero market share; 
we start in the manufacturing business with zero market share. 
We have incentive regulation, instead of rate-of-retum regulation, 
all across the country; and there is no incentive to put in high-cost, 
low-function equipment or compete on that basis. 

There is a very large wireless venture going on in this country. 
There are two or them that have been announced. We cannot be in 
the long-distance business, associated with our own wireless enter- 
prise, while there are two substantial competitors that are engaged 
in merger discussions and pending mergers that can do that. So, 
we do not have the relief to do that. 

Time-Warner cannot be in the long-distance business in Orlando, 
Florida, because of the taint that they have in their association 
with us. And we want to bring competition to that market. We fiilly 
intend to compete with our former brethren, and they intend to 
compete with us by virtue of their intentions. 

And my view is: Let the competition begin. And do not set up 
separate subsidiary requirements. Do not set up all kinds of over- 
sight, to the degree that it disincents the very thing we are trying 
to create here. 

And I guess that is a very emotional statement. But I think there 
are so many aspects of this bill that I am terrified by, that just 
simply have to be fixed; or I would say, no legislature is better 
than what is contained herein. 

Senator Mathews. Mr. McKinnon. 

Mr. McKinnon. Yes, Senator. I think, if competition has proven 
beneficial in the long-distance market — we now have more choices, 
it is perceived that the public feels better, prices have come down — 
to me it is just a natural that we should have competition at the 
Local exchange. 

We do not have it today. There is a monopoly at the Local ex- 
change. To grant manufacturing capability to that monopoly could 
lead to an abuse of power. 

And I say: Let everyone compete. I do not have any problem with 
the statement you made earlier. But let us get competition at the 
Local exchange up and running; have it there so that I, as a 
consumer, have a choice. And then, I say, let everybody compete. 

Senator Mathews. I cannot help but follow up with a statement 
that I made about the cable, about the lines already going into the 
homes. 

Now, how difficult is it for competition to be immediate, with 
that situation already happening? Now, I am not saying it is desir- 
able; but how difficult is it for it to be immediate, in that situation? 



217 

Mr. McCoRMiCK Senator, we are ready to do it. We are doing it 
in the U.K right now. We are partners with TCI in the U.K, in 
24 franchises over there, and we are competing with British 
Telcom. We are capturing 20 percent of the residential customers 
that are ordering telephone service from us on our cable system, 
and about 15 percent of the business customers are ordering tele- 
phone service on our cable system. 

The technology is there. Ajnerican technology is over there, creat- 
ing this, between AT&T and First Pacific networks. That very 
equipment is what we want to install in Orlando, FL, and we have 
plans to do it throughout the country. TCI plans to do it, and they 
are the largest cable operator. 

The potential exists today. We are within — we are installing the 
equipment as we speak, and the enablement as we speak, to nave 
this take place. 

And my view is, in the next 2 years, you are going to see dra- 
matic changes in the landscape for competition to exist on a side- 
by-side basis. Not to mention five or six wireless competitors — ^you 
do not need to be wired — plus four or five direct satellite broadcast 
competitors that can bring these services into the home. There are 
unbelievable choices at hand. 

Mr. McKiNNON, But today — I agree, the other technology is 
there — ^but today, I as a consumer do not have a choice. I have one 
local exchange carrier, and only one. And I say that, that is fine. 
Let us get everybody, let us put in competition. And once the com- 
petition is there, where I can select as a consumer, then I say, 
Fair. Let everybody go head to head, and the best person wins." 

Senator Mathews. If I could say one other word: I think we as 
a committee, or we as a Congress, have two choices. I think we can 
pass legislation that sets up some other barriers or guideposts, or 
sets parameters; or I think we can set legislation that removes it 
and levels the playing field. And I think that is what we are trying 
to decide. 

Thank you, Mr. Chairman. 

Senator DORGAN. I might just observe that I drive back and forth 
to the Capitol every day, in the morning and the evening, from 
about 10 miles away. And whoever the television buyer is for the 
advertisements, I think by the long-distance groups, they have got 
their demographics right. 

I have sure heard a lot of the commercials; and the commercial 
that you have apparently targeted to my car are commercials that 
talk about this dramatic drop in cost of long-distance service 
through this wonderful and breathtaking vehicle called competition 
that Adam Smith wrote so much about; and how hogtied we are 
in the local markets with almost no competition. So, I have heard 
that message often, in recent weeks. 

Do either of you doubt, however, Mr. McCormick's assertion that 
we are headed toward a substantial amount of competition? Is 
technology leapfrogging sufficient in your minds, as it is in his and 
many others, that there is not any way that they are going to get 
by without competition in the years ahead? I would be interested 
in your observation, before we conclude. 

Mr. Major. I will start. I have seen estimates that are as long 
10 years; and I will offer that the current business is throwing off 



218 

dramatic levels of cash that, by any business' dimensions, are re- 
spectable. 

If it is easy to get to competition quickly, then, when you raise 
that that should be the test, there should be no objection because 
we will be there quickly. Yet there is substantial objection; and 
that leaves me thinking that some of these more pessimistic stud- 
ies may, indeed, be correct. 

Senator DORGAN. Well, this has been a most interesting panel, 
and we appreciate, the committee appreciates very much your con- 
tribution. The chairman, regrettably, is at another function and is 
returning momentarily. 

But we have had the opportunity to have your statements, and 
they will be considered. And we very much appreciate your appear- 
ance today. 

Next, we will hear from panel No. 2. And this panel is released. 
The second panel will please come forward. 

That will be Mr. Ron Loewen, vice president and general man- 
ager of Cosmos Broadcasting Corp.; Mr. John Siegel, senior vice 
president of Chris-Craft/United Television; Mr. Thomas Stroup, 
president of the Personal Communications Industry Association; 
Mr. Andrew Jay Schwartzman, executive director of Media Access 
Project; and Mr. Robert Rast, vice president of HDTV Development. 

We would ask the second panel to come forward and take seats, 
and we would ask others who will not remain with us to leave the 
room; and I would ask Mr. Mathews to chair the hearing until the 
chairman arrives. 

Senator Mathews [presiding]. Let us come to order. 

On behalf of the chairman, let me welcome this panel here this 
morning. Let me indicate that your complete statements will be 
made a part of the record, and you are free to summarize your 
statements in whichever and whatever way that you desire. 

On behalf of Senator Rollings let me especially welcome Mr. Ron 
Loewen from his home State of South Carolina, and he is on the 
floor this morning taking care of some business and he hopes to get 
here before this is over, but he wanted you to know that he par- 
ticularly is pleased that you are here, and that all of you are here, 
but someone from his home State is here to testify with respect to 
this matter. 

The order in which the panel was introduced, Mr. Loewen is the 
first presenter. Do we want to proceed in that manner? Does any- 
one have a time problem? Mr. Loewen, you are recognized. 

STATEMENT OF RON LOEWEN, VICE PRESroENT/GENERAL 
MANAGER, COSMOS BROADCASTING CORP., WIS-TV 

Mr. Loewen. Thank you. Senator. I am Ron Loewen, vice presi- 
dent and general manager of WIS Television in Columbia, SC, and 
I am pleased to represent the National Association of Broadcasters 
at today's hearing. 

The NAB strongly endorses S. 1822, the Communications Act of 
1994, which the chairman. Senator Danforth, and others have of- 
fered. This legislation represents a major step forward in setting up 
the rules by which the information highway of tomorrow will oper- 
ate. 



219 

Frankly, the broadcasting industry owes the authors of this legis- 
lation a debt of gratitude. In the rush to build the national infor- 
mation highway many, including some in the administration, seem 
to forget the historically important role of local broadcasters. Had 
it not been for the insight of the sponsors of S. 1822, broadcasters, 
and the important concept of localism would have been the first 
casualty on the road to the future. 

The genius of the 1934 Communications Act was the creation of 
the public interest standard and the birth of the concept of local- 
ism, a system based on diversity and local responsiveness which 
places a special responsibility on broadcasters to serve the public 
interest. Localism links radio and TV stations to their communities 
in a way that none of our competitors can match. 

In South Carolina, the devastation of Hurricane Hugo is still 
etched in our memories. But South Carolinians also remember the 
incredible response by local broadcasters who provided early 
warnings, emergency information, as well as a steady flow of news 
and vital communications in the days and weeks following the dis- 
aster. When Hugo came to South Carolina our citizens turned to 
local broadcast stations, not the cable services for which they pay 
so dearly. 

The wonderful thing about vour 1994 act is that it, too, recog- 
nizes broadcasting's unique role of localism in our information in- 
frastructure. It maintains the best of the 1934 act while moving us 
forward into tomorrow's technologies and increased competition. 
Broadcasters have been in a competitive world from the beginning. 
We do not fear the additional competition that is coming to our in- 
dustry. But in order to remain viable, we need the vision that this 
bill provides. 

First, S. 1822 has safeguards to protect consumers and other 
competitors from unfair monopoly activities by the RBOC's and 
other carriers. The prohibition against telcos simply buying up 
cable systems in the same service area is the only way we can pre- 
vent the substitution of one monopoly — cable — with a larger, even 
more powerful monopoly, the local telephone company. Such merg- 
ers will lead to less competition and not more, and will not serve 
the interests of either the general public or of other competitors in 
the video and audio marketplace. 

Your legislation also recognizes the need to recognize separate 
subsidiaries so as to prevent unfair competition from Telcos using 
their massive ratepayer base to subsidize their unregulated serv- 
ices. Your constituents phone bills should not include a hidden tax 
that pays for these new business ventures. We are also pleased 
that you direct the Commission to address necessary marketplace 
protections including syndicated exclusivity and network non- 
duplication that is vital to local broadcasting. 

Second, your legislation acknowledges the need for a thorough re- 
view of all broadcast ownership restrictions. In the world of new 
technologies, broadcasters can only thrive if we can face our com- 

Eetition on equal terms. Does it make sense for TV broadcasters to 
e limited to one channel in a given market if a local telco can pro- 
vide hundreds of channels? How can radio licensees compete if 
telco-delivered audio services provide scores of new signals to a 
local community? We applaud your directing the FCC to review all 



220 

of the current structural limitations to see how and where, appro- 
priately, relief should be gpranted. 

Third, your legislation recognizes that in order to maximize our 
ability to serve the public, broadcasters need to have spectrum 
flexibility. Once radio and television have transitioned to digital 
broadcasting, consumers will be able to avail themselves of many 
new services that can be built into our broadcast service. 

The Nil can be many things, but there are two qualities it will 
not have without broadcasters: universality and low cost. We are 
both. We do not discriminate between economic classes of Ameri- 
cans. We are universal and free to anyone, anywhere, with a radio 
or TV. We are today's answer to rural America's information needs. 
And if you give us the chance we can be a major competitor to the 
wired and satellite delivered worlds. 

Let me sum up by saying that the authors of this legislation 
have accomplished a great deal already. You have made the public 
interest paramount in this bill, and you have retained the system 
of localism that broadcasting has provided these many years. S. 
1822 provides the framework for future competition. 

We look forward to working with you to help ensure 
broadcasting's place in this new telecommunications world, and we 
salute you ror this outstanding bill that is both procompetition and 
proconsumer. 

Thank you. 

[The prepared statement of Mr. Loewen follows:] 

Joint Prepared Statement of Ron Loewen and John Siegel 

Mr. Chairman, the National Association of Broadcasters (NAB) and Association 
of Independent Television Stations (INTV) appreciate being asked to testify before 
the committee today. NAB is the trade association that represents the owners and 
operators of America's radio and television stations, as well as the major networks, 
and INTV represents the nation's commercial, independent television broadcasting 
stations not affiliated with one of the three major national television networks. 

We welcome this opportunity to comment on S. 1822, which is, on balance, an out- 
standing piece of legislation. This legislation has great merit and clearly recognizes 
the role of* broadcasting in the National Information Infrastructure (Nil). 

Broadcasters have been serving the American people with news, information and 
entertainment for more than seven decades. Indeed, radio and television have been 
the heart of the nation's "information infrastructure." Broadcasting is where jjeople 
automatically turn for their daily and, impwrtantly, emergency information needs. 
When the earthquake shook California, when the floods swept the Mid-West, and 
when hurricanes Andrew and Hugo hit the East Coast, we ail witnessed just how 
indispensible broadcasting is to delivering information and service to people and 
communities in need. 

Broadcasting remains the single free and "universal" service available in this 
country now and in the future. However, in the rush to move forward on the so- 
called "information highway," we believe the need to include broadcasters as an in- 
tegral part of that grand design has been largely overlooked bv the Administration 
and by some in Congress. We cannot allow that to happen. Broadcasters play far 
too important a role in our society for our industry to oe shunted aside under the 
guise of embracing new transmission paths. It is important to remember that of all 
of the technologies vying to deliver broadband information services to Americans, 
broadcasting has the advantage of offering consumers maximum choice. The telco/ 
cable industries have and will continue to act as information "gatekeepers," but 
broadcasting will vest more control of the information highway directly in the hand 
of consumers. 

THE NATIONAL INFORMATION INFRASTRUCTURE 

Over-the-air, locally based radio and television broadcasters are and will remain 
the only means of providing free, innovative, universal, non-discriminatory service 



221 

to the public. Therefore, the Nil must include policies that acknowledge the role 
that broadcasting plays today and in the future in serving the information needs 
of all Americans. Broadcasting is the best medium to achieve many of the stated 
goals of your legislation and of Nil policy in general, including: encouraging private 
investment; providing for and protecting competition; providing open access to the 
network; avoiding the creation of information "haves" and "have nots"; creating far 
more efficient use of radiomagnetic spectrum, and encouraging flexible and respon- 
sive government action. 

Private investment will be spurred by ensuring that there is more competition for 
all phases of the information nighway. Broadcasters — as the result of the tremen- 
dous advancements in digital transmission technology — will soon have the techno- 
logical capability to provide many of the same services as are now provided on other 
distribution systems, including telephone and cable distribution networks. Digital, 
wireless transmission technology permits these new services to be offered by broad- 
casters without requiring massive up-front infrastructure costs. In addition, because 
there are an average offive or six television stations and up to 40 radio stations 
in each market, there is a potential for dozens of competing broadband information 
providers in each market. 

In addressing the development of the Nil and resolving the question of telco entry 
into cable, discussion in some quarters has focused on the advent of competition be- 
tween and among just two distinct monopolies — local telephone companies and cable 
TV operators. In opening these two monopolies to competition with each other and 
hoperully other entities, we must not ignore or damage existing, related competitive 
markets. While two competitors are better than one, we want an information infra- 
structure with as many players in every market as possible. Reciprocity is the key 
to unlock competition. All players, wired and wireless, need to be given the same 
freedoms and opportunities to provide information services to Americans. 

Also, the bill you are considering emphasizes the need to ensure non-discrimina- 
tory access to telephone company networks. It is also in the public interest to ensure 
open access for local radio and television commercial stations, often the only provid- 
ers of local news, weather information, and public service programming. We are the 
only ones who provide their services free to both rich and poor, urban and rural, 
educated and those not so fortunate. Broadcasting can ensure that the economically 
disadvantaged do not become the informationally disadvantaged. 

THREATS TO COMPETITION IN THE ABSENCE OF COMPREHENSIVE LEGISLATION 

Whatever policies Congress and the Administration adopt concerning the National 
Information Infrastructure (Nil), the byword must be competition. Without competi- 
tion between telephone companies, cable operators, satellites, broadcasters and 
other media, the American people will not fully realize the benefits of the new tech- 
nologies made possible in a digital world. 

Any legislation must establish a framework that provides at its roots real choice 
and real oenefits to consumers — along with assurances of access to telco and cable 
deliveiT systems by a wide range of information providers. But as cable operators 
and telephone companies merge, convergence coula easily turn into concentration — 
concentration of monopoly power, concentration of access (i.e., becoming the ultimate 
"gatekeeper"), and concentration of resources. 

The Bell Atlantic federal court decision i last year was a serious blow to efforts 
to ensure a competitive marketplace. When the court ruled that the cable/telco 
cross-ownership provisions of the 1984 Cable Act were unconstitutional as they ap- 
plied to Bell Atlantic, some observers saw the decision as a dangerous step in the 
telcos' efforts to enter unregulated businesses. It removed the last, thoudi narrow, 
restriction on telcos entering the mass media/information services area, leaving no 
restrictions or regulations that would preclude cross-subsidies and anti-comf)etitive 
behavior. As we know, the Regional Bell Operating Companies (RBOCs) have made 
no secret of their desire to enter into video and audio services and other activities 
which they were prohibited from entering under the Modified Final Judgment 
(MFJ).2 

Broadcasters are eager for development of a new telecommunications regime that 
would allow for fair and equal access to a national information infrastructure. But 
what we have seen bom out of the Bell Atlantic court case and that company's sub- 
sequent attempted merger with TCI was not "competition" — but a joining together 



^Chesapeake and Potomac Telephone Co. of Virginia v. United States, 830 F. Supp. 909 (E.D. 
Va. 1993.), appeal pending, No. 93-2340 (4th Cir. filed Oct. 15, 1993). 

'United States v. American Telephone and Telegraph Company, 552 F. Supp. 131 (D.D.C. 
1982). 



222 

of two huge communications monopolists with no balancing between entry and the 
assurance of future competition. 

We also are concerned by the RBOCs' "changing" attitude toward universal deliv- 
ery of broadcast service. In our industry's many conversations with them over recent 
years, they have repeatedly assured us that they were interested in carrying broad- 
cast signals in the event that they were allowed to provide video services. In fact, 
they repeatedly assured us that tney had no problem with must carry, as enacted 
by the Congress as part of the Cable Act of 1992. Yet just a few months ago, all 
but one of the RBOCs opposed must carry in a brief in the Supreme Court, claiming 
that must carry provisions would infringe on their First Amendment rights. With 
telcos now entering the cable business, we can expect that they will also adopt the 
cable industry's notion that the wireline provider should also serve as the gate- 
keeper of the video marketplace. 

Removal of regulatory barriers that inhibit competition is another stated goal of 
the NIL Yet in many ways, broadcasters are still being treated by regulators as we 
were 70 years ago when the first AM radio stations went on the air. We are proud 
of our record of serving the public interest and have no desire to stop doing that 
vital work. But what we do seek in this new world of information providers is the 
removal of artificial barriers and impediments which limit our ability to serve and 
to compete against business operators with much deeper pockets. Why should there 
be no limit on a cable company or on a telephone company on households served 
but there are on broadcasters? Why should there be no limit on cable companies or 
telcos on how many cable systems can be owned by them, but there are on broad- 
casters? And why should it be that while broadcasters cannot own cable systems in 
their own markets, this is not the case for at least Bell Atlantic (given the Bell At- 
lantic case)? 

In a world of "500 channels," how can we possibly hope that single-channel pro- 
viders will survive unless we give them the regulatory freedom to do so? 

We also believe that permitting Hexible use of broadcast spectrum would advance 
one of the integral goals of S. 1822 — eliminating regulatory barriers that prevent 
industries now restricted to one type of service from providing any service which 
they are technologically able to transmit. As we all know, through a diverse and un- 
limited variety of telecommunications carriers — cable, telco, cellular and broadcast — 
the Nil will be enhanced, and consumers will realize lower costs, improved services 
and expanded choices. 

With the increased spectrum efficiency that digital technologies allow, broad- 
casters could and should provide new competition in a number ofservices now pro- 
vided by wireline businesses Imagine if you will, these potential new services broad- 
casters could provide: 

• broadcasting additional, and more targeted information regarding emergencies, 
inclement weather, school closings, traffic and other local conditions; 

• broadcasting information to personal digital assistants that people carry in 
their pockets or briefcases; 

• broadcasting data to pagers or fax machines; 

• broadcasting an electronic version of a newspaper, complete with text, graphics, 
video and audio; 

• broadcasting prescription drug alerts or specialized medical information to doc- 
tors and hospitals through digital medical networks embedded in our broadcast sig- 
nals; 

• broadcasting data or even TV programming to laptop computers; or 

• providing additional information along with advertising. For example, if a car 
commercial were airing, viewers could access availability, price information and 
even maps of how to get to the nearest dealer. 

In a digital world, our efficient, wireless distribution system can and should form 
the basis for additional competition in our information infrastructure. Our digital 
transmissions will expand tne scope of services that we can offer to those stops 
along the information highway that we already reach almost universally — hospitals, 
schools, universities, libraries and, of course, American households. 

In fact, broadcasting has the widest coverage of any wireless or wired media 
today. More households have televisions and radios than have telephones or cable 
service. Ninety-nine percent of homes in the United States have a radio (the average 
home has 5.6 radios), 98 percent of homes have television (the average home has 
1.8 sets), but only 93 percent of homes have telephones and only 62 percent of 
homes have cable (and only 40 percent of TV sets are connected to cable). Over-the- 
air free television and radio reach nearly every American and at a fraction of the 
cost of providing wired services. We are the source people turn to in times of disas- 
ter, sucn as the recent Los Angeles earthquake, when we helped save lives and pro- 
vided enormous beneficial service to the public. 



223 

Beyond broadcasting's natural wireless advantages in providing universal service, 
broadcasting has a speciiic, unique statutory mandate. The Connmiunications Act of 
1934 explicitly requires a broadcasting structure built upon a foundation of locally 
based radio and television stations that are equitably and widely distributed 
throughout the nation. Furthermore, these local stations have public interest obliga- 
tions that are incumbent upon no other wired or wireless medium. Legislation must 
recognize broadcasting's place in the communications infrastructure of the future to 
ensure that this public service remains available to all of our citizens. 

broadcasting's vision 

With this background, the NAB Board of Directors approved the following policy 
statement on the Nil: 

Through the Nil, the federal government is attempting to establish com- 
prehensive, technology-neutral policies that encourage the universal distribution 
of broadband services to the puolic. The stated goals of the Nil include the pro- 
motion of competition, technological innovation, private investment in delivery 
systems, and universal, non-discriminatory service for all consumers. To date, 
the Nil has failed to include broadcasting as an integral part of its vision of 
the nation's information infrastructure. 

The over-the-air, locally based radio and television broadcasters are and will 
remain the only means of providing free, innovative, universal, non-discrimina- 
tory service to the public. Therefore, the NH must be expanded to include poli- 
cies that acknowledge the role that broadcasting plays today and in the fiiture 
in serving the information needs of all Americans. To that end, NAB rec- 
ommends the following: 

1. Removal of regulatory barriers that inhibit competition is a stated goal of 
the NH. To ensure regulatory freedom and a pro-competitive environment, the 
government should review broadcast rules and modify or eliminate any that 
may restrict the full participation of broadcasters in the Nil. In addition, broad- 
casters should be given the flexibility to utilize allocated broadcast spectrum to 
offer competitive digital services which supplement our traditional free, public 
interest-based services. 

2. The Nil will be successful only if the government affirmatively establishes 
clear and enforceable policies that promote full and vigorous competition among 
wired and wireless service providers. Pro-comp)etitive safeguards that are need- 
ed in legislation include the following: 

• A competitive, multi-wire marketplace should be promoted by prohibiting 
telephone company purchase or control of "in-region" cable systems and by 
requiring the establishment of common carrier-based video platforms. 

• To provide continued access to broadcast signals, regulatory standards 
must be set to ensure non-discrimination in navigational systems. 

• To protect against the possibility of cross-subsidization, telephone com- 
panies should be required to offer video/audio services only through sepa- 
rate subsidiaries, with structural separations beyond accounting proce- 
dures. 

• Legislation should include swift and certain penalties to deter anti- 
competitive behavior. 

• The wired delivery of video/audio progranmiing must ensure the integ- 
rity and preservation of the locally based system of broadcasting, through 
such requirements as the syndicated exclusivity and network non-duplica- 
tion rules. 

• The protections of the 1992 Cable Act, including must carry, 
retransmission consent, and buythrou^ prohibitions 1 should apply to the 
distribution of video programming through wired delivery systems. 

We are extremely pleased that in your legislation, Mr. Chairman, you and the 
other sponsors have addressed the main concerns of our industry. S. 1822 goes very 
far to address the three basic tenets of NAB's and INTVs Nil policy, including (1) 
strong safeguards that promote vigorous competition among wired and wireless pro- 
viders: (2) a review of radio and television broadcast rules that may restrict broad- 
casters' full participation: and (3) flexibility to use allocated broadcast spectrum to 
offer competitive services that supplement our free, public interest based services. 

Let us now look at S. 1822 to examine how the legislation complements our indus- 
try's vision of the future information highway in these three critical areas. We 
would like to point out the bill's many strengths, and note several areas that we 
believe can be "fine-tuned" before this very significant telecommunications bill 
moves forward. 



224 

COMPETITIVE SAFEGUARDS 

First, the legislation rightly recognizes the need to provide effective and enforce- 
able safeguarcfe to ensure that all competitors can have fair and non-discriminatory 
access to the nation's information highway. S. 1822 does a good job of helping to 
avoid the trading of one monopoly — cable — for an even larger monojwly, the phone 
companies. 

Requiring a telco to provide video programming through a separate subsidiary 
will greatly deter anti-competitive activity. This provision is welcome as it will less- 
en telcos' ability to use their massive ratepajyer case to subsidize their unregulated 
services, thus reducing the likelihood of uniair competition. 

We also support the legislation's limiting telco ownership interest in an existing 
non-affiliated cable system in its telco service area to five percent. This "in-region 
buyout" prohibition is vital to ensuring competitive delivery of video, voice and data 
to consumers. We also feel that any exceptions the committee may wish to consider 
for rural areas and financially distressed cable companies should be drawn as nar- 
rowly as possible. 

Another broadcaster concern addressed by the legislation is protecting the pro- 
granuning that is created or purchased for exclusive distribution in a given market. 
The integrity and preservation of the locally based system of broadcastmg is of para- 
mount importance, and S. 1822 requires the FCC to examine the application of its 
regulations which protect those proprietary interests to new distribution tech- 
nologies. These syndicated exclusivity and network nonduplication rules provide 
critical marketplace protections, and we applaud the inclusion of this directive in 
the legislation. 

S. 1822 provides that telephone companies that offer video programming services 
to their customers will be regulated for those services as a cable operator under 
Title VI of the Communications Act. We support this requirement. However, we be- 
lieve the legislation can be improved by explicitly providing that telephone compa- 
nies that are capable of transporting video programming must offer non-discrimina- 
tory access to some portion of that capacity under common carrier principles. This 
would help to further the bill's goal of encouraging nondiscriminatory access, inter- 
operability and interconnection. 

There is one other safeguard that the Committees should include in the final bill. 
This legislation does not yet address the issue of who will control the navigation 
tools that will be used on the information highway. 

In the 500-channel future, a key to using such a system will be how consumers 
access the various choices available. As we learned when a few major airlines owned 
the reservations computer network used by most travel agents, there is plenty of 
opportunity to "fudge the system to favor one provider over another. When a cus- 
tomer dials up this information highway program in his or her home, how the 
choices are presented will have a great impact on how fair and competitive the sys- 
tem is. 

No one delivery system — be it telco or cable — should be allowed to discriminate 
against a potential competitor. Specifically, in our case, all broadcasters and other 
information services providers run the very real risk of being disadvantaged by a 
television viewers' on-screen menu or remote control. Local broadcast stations, net- 
works and program choices will be hurt if they are not readily available to viewers. 

To remedy any possible anti-competitive behavior regarding navigation of the Nil, 
regulatory standards must be set to ensure non-discrimination in navigational sys- 
tems — the systems that will be used to help consumers make choices about the myr- 
iad of services which are available to them. 

Our final comment on legislative safeguards concerns the Administration's pro- 
posed "Title VII" regulatory scheme. While we are not necessarily opposed to a uni- 
form regulatory structure for similar telecommunications services, we believe the 
Administration's proposal does not adequately protect competition. A more detailed 
analysis of NAB's and INTV's concerns with the Administration's Title VII proposal 
is provided in Attachment I to this document. 

Through our comments, you can see that there is opportunity to strengthen S. 
1822's safeguards, and it is equally important that the legislation ensure swift ac- 
tion and certain penalties to police anti-competitive behavior. The potential for ir- 
reparable harm is great; therefore, we are sure you will agree that strong deter- 
rents, timely enforcement and meaningtul penalties are critical to prevent any "pile- 
up" of casualties from unfair competition on the information highway. 

STRUCTURAL REVIEW 

Second, the legislation recognizes that as we move forward into new technologies, 
it makes little sense to have old-fashioned structural rules for one industry — broad- 



225 

casting — and little or no rules for its competitors. It is only appropriate to expect 
that in a bill designed to remove barriers that will free other technologies to move 
into our traditional business — broadcasting be given the same freedoms to compete. 
Without these freedoms, the future viability oi broadcasting and our public service 
mandate will be compromised. 

We are pleased that S. 1822 directs the Federal Conununications Commission 
(FCC) to underteike a review of national and local ownership rules on radio and tele- 
vision broadcast stations. Those regulations that inhibit competition should be re- 
moved or modified. 

Specifically, the legislation directs the Commission to look at these structural 
rules: 

• national ownership rules that limit persons to no more than 12 TV station li- 
censes; 

• national ownership rules that limit persons to no more than 18 AM and 18 FM 
stations (expanding to 20-20 in September, 1994); 

• the general prohibition on ownership of TV and radio stations in the same mar- 
kets (except in the top 25 markets, where TV/radio ownership is permitted if there 
are 30 remaining independent voices); 

• duopoly rules that prohibit ownership of more than one TV station in a market; 
and which prohibit ownership of more than two AM and two FM radio stations in 
larger markets (not to exceea 25 percent of market listening) and three radio sta- 
tions in smaller mariiets; and 

• cross-ownership prohibitions on owning broadcast stations and newspapers in 
the same market, or TV stations and cable systems in the same market. 

SPECTRUM FLEXIBILITY 

Third, S. 1822 rightly recognizes the potential for broadcasters to expand upon 
their traditional base of service. We are pleased that the bill reflects the fact tnat 
to utilize fully the benefits of new digital broadcast technologies, broadcasters 
should be authorized to use our licensed spectrum more flexibly. Ii competitive serv- 
ices are to be universally available to all Americans, then broadcasters must have 
the flexibility to include these services on an ancillary and supplemental basis with- 
in our already eissigned spectrum. This concept of flexible use of allocated spectrum 
is vital to both a competitive Nil and the future viability of the broadcast industry. 

Broadcasters in no way intend to use flexibility to supplant our public interest 
service obligations. Rather, providing new services coula create a new revenue 
stream that will enable broadcasters to sustain and enhance our core service, pro- 
viding local news, entertainment, sports, weather and other important non-program 
related information and services to our communities. By authorizing this flexibility, 
consumers will have improved broadcast service in combination with increased 
choices and competitive costs for other information services. 

Yet, the actual flexibility language currently in S. 1822 is unduly restrictive of 
the services for which broadcasters could use their licensed spectrum. While it may 
not be the bill's intent, if the current language in S. 1822 is given its narrowest pos- 
sible reading, broadcasters would be granted less flexibility in our digital future 
than we now have in using the Vertical Blanking Interval (VBI), and FM and TV 
subcarriers. 

Prior to 1983, the FCC limited the use of FM subcarriers to those services that 
were "broadcast related." In 1983, the FCC changed its policy to allow FM stations 
to employ their subcarriers for any legitimate communications purpose, broadcast- 
related or not. In subsequent years the FCC has adopted a similar regulatory stance 
for the use of TV subcarriers and the VBI, and for the use of AM "residual carrier 
power" for such purposes. Among the services now so authorized are radio paging, 
utility load management, data distribution, music background services, facsimile 
transmission and stock market reports. 

As the Commission said in authorizing "flexible use" for FM subcarriers, there is 
no information "to indicate that such expansion of permissible use would be incon- 
sistent with the continued provision of quality, or even enhanced, FM service to the 
general public." In fact the Commission also opined that: (1) "Such services may be 
offered in direct competition with other, nonbroadcast, radio licenses," (2) this action 
"ensures efficient FM spectrum utilization and removes unnecessary burdens im- 
posed on FM licensees due to overrestrictive rules," and (3) "we believe that a wide 
variety of services of interest to the public will be served if subcarrier services are 
no longer bound to materials of a broadcast nature * ♦ ♦ the regulatory changes 
we are providing permit the broadcast industry greater flexibility to develop and 



226 

ofFer services that specifically address the needs of individual applications and to 
alter these services in a manner consistent with the dynamic environment." 3 

The current FCC rules authorizing use of the TV VBI for "telecommunications 
service" state that such service "is of an ancillary nature and as such is an elective 
subsidiary activity. No service guidelines, limitations, or performance standards are 
applied to it. The kinds of service that may be provided include, but are not limited 
to, teletext, paging, computer software and bulk data distribution, and aural mes- 
sages."^ 

The same reasoning that now applies to these supplemental and ancillary analog 
applications should also apply to broadcasting's future use of digital technology in 
the information infrastructure. There is no reason to treat digital service differently; 
in fact, digital transmission technology provides a unique new opportunity for broad- 
casters and consumers. Digital broadcasting expands our ability to provide multiple 
mass and personalized services simultaneously. Because of the ability to intermix 
the bits related to different services in the same broadcast bit stream, these services 
can be simultaneously supplied to different kinds of receivers. Data, video, faxes, 
etc., can tdl be sent down the same digitized pipeline at the same time. For our in- 
dustry's purposes, intelligent receivers — be they a television set, a computer, or 
some combination device — would identify, capture, and retain only that data that 
the user desires, letting the rest go by. 

In digital television transmission, the number of bits necessary to transmit an 
ATV picture will vary dynamically with the type of pictures being transmitted. Full 
motion video may occupy virtually all of the available capacity, but a picture of an 
anchor sitting at a desk a moment later could be provided with only a fraction of 
the total capacity. The broadband digital technology we envision would allow broad- 
casters to use the full capacity of the channel at all times by inserting other infor- 
mation into the transmission when the ATV transmission does not require all of the 
total bit stream. 

As you can see, what is different about broadband digital technology from any ex- 
isting system is that shared uses wiU be able to co-exist in a broadcast station's 
spectrum across the entire channel bandwidth, with the number of bits devoted to 
other uses potentially varying from moment to moment. Our 6 MHz channels could 
not be sliced "salami-style" into narrower channels. Instead, we envision a system 
where differing types of information would be transmitted on an intermixed basis. 
In fact, the cellular industry already employs digital technology allowing them to 
transmit — during the set-up and breakdown of cellular telephone calls — data un-re- 
lated to the call. This technology allows the cellular industry to be more spectrum 
efficient and to develop new business opportunities. We seek the same efficiencies 
in offering our broadcast services. 

We believe that permitting flexible use would advance the goals you seek to 
achieve in S. 1822. You believe, Mr. Chairman, as we do, that the introduction of 
new competitive services will benefit the American people by providing them with 
better information services at lower cost. Allowing broadcasters also to provide new 
ancillary types of services would foster innovation and provide an additional com- 
petitive incentive and check on potential monopolistic abuses. It is also important 
to remember that increasing the variety and scope of broadcast services will help 
to prevent the development of a society of information "haves" and "have-nots." 

Lti that connection, it is very likely that the nature of the data services offered 
by broadcasters under this amendment would be different from the services which 
telephone (including PCS and cellular) and cable companies now envision. For those 
companies, the intelligence in the system is likely to reside in the "switch" (or some 
similar point removed from the consumer), with specific services being provided to 
consumers only on request and subject to a usage charge. The tradition and tech- 
nology of broadcasting are different, and the services that broadcast stations will 
f)rovide we believe will reflect those differences. As we described above, the intel- 
igence in a multimedia broadcasting system will be in the receiving equipment, and 
many of these new services may well be free to the public, as our signals are today. 
As the cost of intelligent receiving equipment and data storage continues to decline, 
consumers will, if flexible uses are permitted, have access to a panoply of ancillary 
and supplemental services, including multiple video services, on a universal basis 
at low cost. 



aPirBt Report and Order in BC Docket No. 82-536, FCC 83-154, adopted April 7, 1983, 53 RR 
2d (P&F) 1517, 48 PR 28445 (1983). 
*47CFR 73.646 (1983). 



227 



PEES 



If we are to be granted the flexibility to ofler new types of ancillary and supple- 
mental services that are not provided for free, or on an advertiser-supported basis 
to the general public, or when competing providers of those services were required 
to obtam spectrum in an auction, we acknowledge that we should pay an appro- 

ftriate fee. We believe your bill should direct the FCC to use the amounts raised 
rom upcoming spectrum auctions as guideposts for establishing fees on broad- 
casters who might someday provide analogous services that carry a cost to consum- 
ers. With such auctions beginning later this year, the Commission will have plenty 
of time to establish the value of such spectrum long before broadcasters can begin 
to offer these new services. Thus, rather than mandating that fees must be eauiva- 
lent to auction returns, the legislation should use those returns as a "ceiling, and 
provide the FCC with appropriate guidance to establish reasonable fees. 

It is important that this legislation recognize that if the level of fees is set too 
high, it will discourage broadcasters from providing untested services and could lead 
to inefficient spectrum usage. The FCC should thus be directed to set fees at levels 
that will encourage new services, reserving the discretion to adjust them as particu- 
lar services prove viable. 

BROADCASTTERS ANSWER CRITICS OF FLEXIBLE USE 

The proposition that broadcasters use the spectrum already allotted to them in 
a more efficient and flexible manner has elicited objections from some segments of 
the telecommunications community. 

With this in mind, we would like to answer some of the arguments raised against 
this proposal: 

More profitable commercial services will displace broadcasting's public interest 
service mandate. 

The vast majority of broadcasters are dedicated to serving their communities 
through their free, over-the-air signals. They realize that providing their main chan- 
nel service is not only good for the public: it is also good business. In addition, both 
radio and television broadcasters must file for periodic license renewals which are 
subjected to strict oversight by the FCC and are subject to petitions to deny or com- 
peting applications for the frequency. If a broadcaster did not continue to provide 
a full broadcast service throughout its license term, it would face a real possibility 
of losing its license at renewal. Even though the minimum hours of operation speci- 
fied in the FCC's rules would permit reduction in the hours of service, it is unlikely 
that broadcasters would curtail their current service levels. If, however, the Con- 
gress or the FCC ever become concerned about broadcasters operating enough hours 
to serve the public interest, the FCC has ample authority to address these stand- 
ards. 

How come broadcasters should not be required to bid for the use of spectrum cur- 
rently assigned to them if they provide new services apart from their main channel 
signal? 

We support a provision which would require the FCC to assess an appropriate fee 
on broadcasters' use of their assigned sf)ectrum for new, non-broadcast uses that 
compete with services provided by entities who acquired spectrum throu^ auctions. 

The question implicitly assumes that the spectrum allocated for broadcasting 
could be divided "salami-style" and assigned to separate users. This assumption is 
inaccurate — the entire bandwidth assigned to a station would be used both for 
broadcasting and for ancillary and supplemental services. There is no way to sub- 
divide that spectrum and maintain advanced television (ATV) service. 

Under the Communications Act, spectrum is only to be auctioned if its principal 
use is for subscription services. Any new services, however, will be oflered in addi- 
tion to a broadcaster's authorized program service, a service that is not subscription- 
based. 

Flexible use will harm the FCC's efforts to encourage the development of HBTV. 

Allowing flexible spectrum use would in no way compromise the FCC's efforts to 
encourage the development of HDTV and would fully preserve the FCC's authority 
to establish standards and regulations for the transmission of HDTV. We believe 
that the FCC should go forward with the process of assigning broadcasters the addi- 
tional spectrum needed for the provision of ATV service. 

Rather than inhibiting the Commission with regard to its ATV proceeding, a flexi- 
ble use provision would simply direct the Commission to do what it is has already 
done for FM and TV service, that is, allow broadcasters to provide new, ancillary 
services in addition to their video or audio program service. Indeed, the FCC, in its 
ATV proceeding, has already raised and received comment on the very issue of such 
additional services. See Advanced Television Systems (Third Report and Order/ 



228 

Third Further Notice of Proposed Rulemaking), 7 FCC Red. 6924, 6968-69, 6980-81 
(1992); Advanced Television Systems (Second Report and Order), 7 FCC Red. 3340, 
3361-62 (1992). 

In fact, the FCC commented that "[s]uch ancillary uses, if technically possible, 
might be critical to successful implementation of ATV in its early stages, when re- 
ceiver penetration is low We have previously permitted ancillary uses of this nature 
to help spur development of a new technology. On the other hand, we would not 
want such ancillary uses to predominate over the primary use of the channel." 7 
FCC Red. at 6981 (footnote omitted). Allowing broadcasters to offer new digital serv- 
ices in addition to their main program service would appear to strike just this bal- 
ance. Thus, the provision of other services in addition to broadcast service as the 
television industry and consumers convert to ATV technology is fully consistent with 
the FCC's HDTV authority. Given the enormous financial commitment and market 
uncertainties that are associated with the development of any digital broadcasting 
service, if the spectrum for that service is not assigned to existing broadcasters and 
they Eire not permitted to make the most effective use of that spectrum as ATV serv- 
ice, it is unlikely that any advanced system of over-the-air broadcasting will be im- 
[)lemented, and the goal of providing universal advanced digital services to the pub- 
ic would suffer. 

Flexible use really is a "spectrum grab" by broadcasters — taking for themselves a 
precious resource for which others must bid at auction. 

No additional spectrum will be allocated to broadcasting in order to provide ATV 
service. The UHF band, on which the FCC expects ATV service to be provided, was 
allocated to television broadcasting in 1945. The FCC now only propeses to assign 
some of that spectrum to broadcasters for advanced television service. The FCC rec- 
ognized that "lajny spectrum needed for a broadcast ATV system will be obtained 
from the spectrum currently allocated to broadcast television." Advanced Television 
Systems (First Report and Order), 5 FCC Red. 5627 (1990). In large measure, many 
of the channels that will be used to provide ATV service could not have been used 
to provide NTSC service consistent with the FCC's interference standards. Neither 
the FCC's ATV proceeding, nor a provision encouraging flexible use of spectrum 
used for digital television service, would require any new spectrum to be allocated 
for broadcast service. 

Broadcast-related service will be relegated to being just a minor part of a broad- 
caster's overall services. 

The level of broadcast service in a digital system will not be dependent upen a 
specified percentage of the broadcast spectrum being used at any moment for that 
service. A "talking head" program might require only a small percentage of the total 
digital bit stream, while full motion video might occupy virtually all of the trans- 
mission capacity. Broadcasters will maintain a full broadcast service on each chan- 
nel that they are assigned, and we accept that the opportunity to provide new serv- 
ices will be contingent upon continuing to provide that service. 

Setting fixed percentages or other bright line tests would only inhibit the FCC's 
authority to adopt standards which reflect rapidly changing technology. While no 
one knows what the elements of tomorrow's ATV broadcasts will be, it is reasonable 
to expect that consumers will grow to demand more, rather than less, of broad- 
casters as the consumer is exposed to the multimedia services of other providers. 
Therefore, no further regulatory requirements are needed, and any efforts to restrict 
the dynamic use of the available spectrum will only reduce the potential efficiencies 
S. 1822 seeks to realize, and limit the variety and types of services that the public 
can eryoy. 

Picture quality is going to suffer. 

There is no likelihood that broadcasters would reduce the quality of their product, 
and there are ample regulatory tools in place to deal with any problem in the un- 
likely event that one arises. Reduced picture oualiW is simply not competitively via- 
ble in an environment where cable operators, MMDS systems, telephone companies, 
and DBS systems all will be ofTering high quality video signals, many of them digi- 
tal, to consumers. In the face of all of these alternatives, the marketplace can be 
relied upen to discipline broadcasters when it comes to video quality. Further, the 
establishment of any digital transmission system requires the adoption of standards 
for both transmission and reception. Only the adoption of one national technical 
standard will persuade equipment manufacturers to offer compatible consumer 
equipment, something whicn the FCC's disastrous AM stereo experience confirms. 
Thus, a broadcaster could not unilaterally change the way in which its video serv- 
ices are transmitted and still expect that consumers could receive the service. Fi- 
nally, should any problems arise, the FCC has full authority under the Communica- 
tions Act to establish standards or to impese appropriate license conditions. 



229 

In short, we want to underscore a number of important issues concerning the 
flexible use proposal: 

• Broadcasters are committed to maintaining free, universal, over-the-air service. 
Broadcasters will offer that service on every assigned channel, will continue to meet 
their public interest obligations, and will operate subject to all present and future 
FCC regulations. 

• A policy of flexible use of broadcast spectrum follows the broad policy objective 
of S. 1822 — the delivery of new services to consumers through the promotion of vig- 
orous competition. No new spectrum would need to be allocated for this purpose. 

• A policy of flexible use of broadcast spectrum will not undermine the FCC's dis- 
cretion or authority to make determinations concerning the delivery of advanced tel- 
evision service (ATV). Broadcasters should not be precluded from bringing valuable 
services to the public consistent with new technology and that may augment their 
revenues so as to provide the best possible over-the-air broadcast services. 

• The FCC should go forward with the process of assigning broadcasters addi- 
tional spectrum for the principal purpose of providing ATV service. Broadcasters 
will use that second channel to further the FCC's goals with respect to advanced 
television. 

• Consumers should be able to receive the maximum benefits from the digital 
broadcasting revolution as quickly as possible. To ensure that objective, broad- 
casters need to be able to make flexible use of their allotted spectrum. 

• The ability to offer these services is consistent with the goal of efficient spec- 
trum use. The authorization of flexible spectrum use for new services is needed to 
ensure that broadcasters have the ability and incentive to develop the most efficient 
spectrum use. 

CONCLUSION 

Mr. Chairman, we concur with President Clinton's call for passage of legislation 
to advance the Nil this year. This is essential. Unless Congress creates a regulatory 
framework soon, we run a serious risk of having the marketplace act and deny 
Americans the very benefits that the Nil envisions. The rules need to be in place 
now, so that the ever-quickening convergence of telecommunications businesses and 
technologies do not foreclose competition in the broadband delivery world. 

Your bill is a giant step in the right direction toward delivering the promised ben- 
efits of the Nil. Consumers and business both stand to gain from the technology- 
neutral, competitiveness driven approach of S. 1822. NAB and INTV look forward 
to working with you to address our concerns, and to move this landmark legislation 
forward. 



ANALYSIS OF FEBRUARY 2ND DRAFT OF PROPOSED TITLE VII 

Title VII regulation would apply only to switched, broadband, interactive, digital 
services. All four elements of tne service must be present. Because the term "inter- 
active" may have a broad meaning (for example, most pay-per-view services could 
be deemed interactive; some over-the-air game shows have gone interactive), it could 
be applied to some forms of current video programming delivery. 

Low Threshold for Title VII Application 

Regulation under Title VII is elective; the firm providing the service must opt for 
Title VII regulation. (Section 702(a).) Title VII status will be determined state-by- 
state — in order to qualify in a particular state, the firm must offer Title VII 
broadband services to at least 20 percent of its subscribers in that state. (Section 
702(b).) The drawback here is that the service need only pass 20 percent of the 
firm's total subscribers; it need have few, if any, actual subscribers lor the service 
in order to qualify for Title VII. The firm's non-broadband services could be freed 
from Title II and Title VI regulation, even though a minute portion of the firm's 
actual subscribers were connected to Title VII broadband services. This could essen- 
tially gut Title II and Title VI regulation. In addition, the structural safeguards con- 
tainea in current legislation would be destroyed, since a telco or cable operator could 
merely opt for Title Vll with a minimal showing of subscriber access. 

Lack of Adequate Safeguards 

Since Title VU regulation relies primarily on non-structural safeguards, i.e., ONA 
and CEI (see sections 704(a) and (c)), there is little protection against cross-sub- 
sidization. Under Title VII, some of the firm's rates would not be regulated, but in 
those areas where the firm has "market power," the rates would be regulated. Al- 
though ONA and CEI are intended to provide nondiscriminatory access and inter- 



230 

connections, and interoperability of equipment, there is no protection from the un- 
regulated side of the operation using personnel and facilities of the regulated por- 
tion of the operation. In fact, Title VU requires the use of shared facilities, which 
would make cross-subsidization easier. 

Ease in Removal of Rate Regulation 

Another troubling aspect is the ease in which a Title VII firm could get out from 
under rate regulation. Rate regulation would be required only if the FCC finds a 
Title VII firm has market jxjwer with respect to the services it offers. (S«:tion 
704(e).) Most telcos can argue — with a fair amount of success — that they have no 
"market power" in video delivery, despite the fact that they have a bottleneck in 
telephone service. Once under Title VII for video delivery, they could then purchase 
in-region cable systems, subject only to whatever regulations the FCC finds it "nec- 
essaiy" to adopt in order to "address the concerns" of the profMsed cross-ownership 
restrictions. (See section 704(g).) By the same token, cable could argue lack of mar- 
ket power in telephony. The Title Vll language is weak, leaving too much up to the 
whims of the FCCJ in order to protect competition. 

Weakened Must Carry / Retransmission Consent Protection 

By the same token, there is no guarantee that must carry or retransmission con- 
sent would apply to a Title VII firm. Section 704(h) only states that the FCC may 
impose regulations "consistent with the principles and objectives" of those sections. 
This indicates that retransmission consent is optional when, in fact, the Cable Act 
makes it mandatory for all multichannel video providers. Moreover, must carry 
would be left to the whims of the FCC. Again, this language is totally unacceptable 
as a means of ensuring application of must carry/retransmission consent to a Title 
Vn firm. 

Marginal Nondiscrimination Requirements to Cable 

Another section (there is no section number included in our draft) would impose 
nondiscriminatory access requirements on channel capacity- of cable systems not 
currently activated or required by Federal law. However, this provision is dramati- 
cally weakened because it does not apply if "technology, costs and market conditions 
would make such offering inappropriate." This is too large of a loophole. 

Absence of Application Process 

Finally, there is no cross-reference to Section 214. Thus, it appears that a Title 
vn firm could construct its broadband facilities — which would also be used for other 
communications purposes — without FCC oversight. No longer would the Commission 
have the opportunity to examine — nor the public the opportunity to comment on — 
the need for the facilities. Since some of the facilities may be paid for by captive 
ratepayers, this is blatantly against the public interest. 



letter from edward o. frttts, president and ceo, national assocl^tion of 

broadcasters 

March 7, 1994. 

The Honorable Edward J. Markey, 
U.S. House of Representatives, 
Washington. DC 20515-6119 

Dear Mr. Chairman: I am responding to your letter of March 3, 1994, on behalf 
of NAB, INTV, ABC, CBS, NBC, and Fox. We are pleased to provide you with addi- 
tional information relating to broadcasters* fiexible use of their assigned spectrum. 

Your specific questions are answered in an attachment to this letter. We want to 
stress several pomts concerning the flexible use proposal: 

• Broadcasters are committed to maintaining free, universal, over-the-air service. 
Broadcasters will offer that service on every assigned channel, will continue to meet 
their public interest obligations, and will operate subject to all present and fiiture 
FCC regulations. 

• A policy of flexible use of broadcast spectrum follows the broad policy objective 
of H.R. 3636 — the delivery of new services to consumers through the promotion of 
vigorous competition No new spectrum would need to be allocated for this purpose. 

• A policy of flexible use of broadcast spectrum will not undermine the FCC's dis- 
cretion or authority to make determinations concerning the delivery of advanced tel- 
evision service (ATV). Broadcasters should not be precluded from bringing valuable 
services to the public consistent with new technology and that may augment their 
revenues so as to provide the best possible over-the-air broadcast services. 



231 

• The FCC should go forward with the process of assigning broadcasters addi- 
tional spectrum for the principal purpose of providing ATV service. Broadcasters 
will use that second channel to further the FCC's goSs with respect to advanced 
television. 

• Consumers should be able to receive the maximum benefits from the digital 
broadcasting revolution as quickly as possible. To ensure that objective, broad- 
casters need to be able to make flexible use of their allotted spectrum. 

• The ability to ofler these services is consistent with the goal of efficient spec- 
trum use. The authorization of flexible sp>ectrum use for new services is needed to 
ensure that broadcasters have the ability and incentive to develop the most efUcient 
spectrum use. 

• Broadcasters expect to pay an appropriate fee when they offer new types of an- 
cillary and supplemental services in the spectrum assigned to them for ATV. 

Perhaps it would also be useful for us to describe how we envision such a provi- 
sion operating. The key element in establishing the ability of broadcasters to provide 
multiple innovative services along with traditional broadcast service was the deci- 
sion to adopt a digital standard for ATV.i The nature of digital transmission is that 
it consists of a stream.of bits, bits that can be television signals, data, or any other 
type of information. Several types of information can be intermixed within the same 
transmission stream, with intelligent receivers picking out those bits from the 
stream that the user demands. In digital television transmission, the number of bits 
necessary to transmit an ATV picture will also vary dynamically with the type of 
pictures being transmitted. Full motion video may occupy virtually all of the avail- 
able capacity, but a picture of an anchor sitting at a desk a moment later could be 
provided with only a fraction of the total capacity. The broadband digital technology 
we envision would allow broadcasters to use the full capacity of the channel at all 
times by inserting other information into the transmission when the ATV trans- 
mission does not require all of the total bit steam. 

What is diflerent about the broadband digital technology that we envision from 
any existing system is that shared uses will be able to co-exist in a broadcast sta- 
tion's spectrum across the entire bandwidth, with the number of bits devoted to 
other uses potentially varying from moment to moment. We envision a system 
where differing types of information would be transmitted on an intermixed basis. 
Intelligent receivers — be they a television set, a computer, or some combination de- 
vice — would identify, capture, and retain only that data that the user desires, let- 
ting the rest go by. 

We believe that permitting flexible use would advance the goals to seek to achieve 
in H.R. 3636, which is intended to eliminate regulatory barriers that prevent indus- 
tries now restricted to one type of service from providing any service which they are 
technologically able to transmit. You believe, Mr. Chairman, as we do, that the in- 
troduction of new competitive services will benefit the American people by providing 
them with better information services at lower cost. Allowing broadcasters also to 
provide new types of services would foster innovation-and provide an additional 
competitive incentive and check on potential monopwlistic abuses. It is also impor- 
tant to remember that increasing the variety and scope of broadcast services will 
help to prevent the development of a society of information "haves" and "have-nots." 

In that connection, it is very likely that the nature of the data services offered 
by broadcasters under this amendment would be different from the services which 
telephone (including PCS and cellular) and cable companies now envision. For those 
companies, the intelligence in the system is likely to reside in the "switch" (or some 
similar point removed from the consumer), with specific services being provided to 
consumers only on request and subject to a usage charye. The tradition and tech- 
nology of broadcasting are different, and the services that broadcast stations will 
provide we believe will reflect those differences. As we described above, the intel- 
ligence in a multimedia broadcasting system will be in the receive equipment, and 
many of these new services may well be free to the public, as our signals are today. 
As the cost of intelligent receiving equipment and data storage continues to decline, 
consumers will, if flexible uses are permitted, have access to a panoply of services, 
including multiple video services, on a universal basis at low cost. 

Thank vou for the opportunity to provide this additional information concerning 
the flexible use proposal. Its adoption will speed the development of advanced broad- 



lAlthough we focus on television in this letter, the same considerations will be applicable and 
opportunities available to radio broadcasters when the FCC authorizes terrestrial digital audio 
broadcasting. Unlike ATV, however, terrestrial DAB will be provided within the same spectrum 
that broadcasters are now using for analog audio broadcasting. Because of the complexity of 
broadcasting advanced digital services in the television spectrum, it is not possible to provide 
those services on the same channel with existing NTSC service. 



232 

casting services, allow broadcasters to utilize their universal, portable technology to 
provide new information services to the public, and foster the more efficient use of 
scarce spectrum resources. 

We would be pleased to respond to any additional questions you may have. 
Kindest regards, 

Edward O. Frtits. 



RESPONSES TO QUESTIONS CONCERNING FLEXIBLE USE OF THE BROADCAST SPECTRUM 

Question. Currently, broadcasters fall outside of the class of spectrum users that 
are required to bid competitively for spectrum under Section 309(j) of the Commu- 
nications Act of 1934 since they do not receive compensation from subscribers for 
the principal use they make of their license. A. should broadcasters bid and pay a 
fee for the use of spectrum currently assigned to them if they provide new services 
apart from their main channel signal? B. In the event broadcasters are assi^ed ad- 
ditional spectrum (e.g., spectrum to be assigned for so-called high definition tele- 
vision (HDTV) service) and seek to use it to provide services beyond their main 
channel signal, should they be recjuired to bid at public auction for the use of this 
spectrum? In either case, how might allowing broadcasters use of spectrum that 
tney have not bid for affect the underlying rationale and fairness of the spectrum 
auction process? 

Answer. Broadcasters should not be required to bid for the spectrum that they 
will use to provide new services. While, under the standards established in section 
309(j), broadcasters arguably should not be required to pay a fee for the con- 
templated use of the spectrum, we support a provision which would require the FCC 
to assess an appropriate fee on broadcasters' use of their assigned spectrum for new, 
non-broadcast uses. 

The question implicitly assumes that the spectrum allocated for broadcasting 
could be divided "salami-style" and assigned to separate users. This assumption is 
inaccurate; the entire bandwidth assigned to a station would be used both for broad- 
casting and for ancillary and supplemental services. There is no way to subdivide 
that spectrum and maintain advanced television (ATV) service. 

Under the Act, spectrum is only to be auctioned if its principal use is for subscrip- 
tion services. Any new services, however, will be offered in addition to a broad- 
caster's authorized program service, a service that is not subscription-based. 

Changing what broadcasters may do with their licenses would not give rise to an 
auction for their spectrum. The legislative history of the auction provision makes 
clear that "[cjompetitive bidding would not be permitted to be used * * * in the case 
of * * * a renewal or modification of the license." H.R. Rep. No. Ill, 103d Cong., 
1st Sess. 253 (1993) (emphasis added). Further, section 309(j) addresses competitive 
bidding primarily for new spectrum. Section 309(jX10) conditions the FCC's auction 
authority upon the reallocation of spectrum from government use, suggesting that 
competitive bidding was not intended to apply to spectrum allocated prior to the 
adoption of auction authority. Since none of the spectrum that broadcasters will use 
will be newly allocated, auctions would not be appropriate for that reason as well. 

These same considerations would apply as well to any requirement that broad- 
casters pay a fee for their use of spectrum for non-broadcast purposes. Indeed, 
broadcasters already provide a number of different non-broaacast services on 
subcarriers and in the television vertical blanking interval (VBI).i Nothing in sec- 
tion 309(j) suggests that Congress contemplated assessing a fee for these or similar 
uses.2 Nonetheless, it woula be appropriate that new non-broadcast commercial 
services be subjected to the payment of a fee to be assessed by the FCC. 

Adoption of flexible use authority for broadcast spectrum would not affect the ra- 
tionale or fairness of the spectrum auction process. It was intended to require users 
of spectrum for new services that are primarily subscription -based to pay for the 
value of that spectrum. Many of those new services will be competitive with pre- 
existing services which obtained spectrum without payment. For example, PCS pro- 
viders will bid for their spectrum, but their voice services will compete with cellular 
operators which, for the most part, were licensed through lotteries. While these con- 
ditions are different, it is not unfair that Congress adopt differing rules for new 
services as its understanding of the communications market develops. Ancillary uses 



iln digital transmission, there will be no subcarriers or VBI service as there are in the 
present analog system. 

2The legislative history specifically states that the enactment of section 309(j) is not intended 
to affect licensing for "subcarriers and other services where the signal is indivisible from the 
main channel signal." H.R. Rep. No. Ill, 103d Cong., Ist Sess. 253 (1993). 



233 

of the broadcast spectrum are just that — sincillary — and Congress' decision that 
broadcast spectrum would not be subject to competitive bidding should not change 
merely because the scof)e of ancillary services may increase with the advent of digi- 
tal technology. 

Question. If broadcasters are allowed to use spectrum to offer services apart from 
their main channel signal, how should the federal government establish the fees 
they should be chargeo? Should the calculation of the fee be based solely on a meas- 
ure of the market value of the spectrum or should other factors be considered? How 
might the government accurately estimate a market price for the spectrum in the 
absence of an auction? 

Answer. As a technical matter, these services will not be offered separately from 
a broadcaster's main program service. Instead, like the services which broadcasters 
provide today in the VBI or on subcarriers, these new services will be part of the 
main channel signal. Indeed, in a digital environment, the non-broadcast "bits" will 
be intermixed throughout the stream of information which contains the broadcast 
signal. Thus, there will be no separate use of spectrum for non-broadcast purposes. 

We support a requirement that the FCC establish an appropriate fee for broad- 
casters based on the amounts paid by providers of competitive services which ob- 
tained spectrum in auctions under section 309(j). If broadctisters ofTer competitive 
types of service, the FCC would be able to determine the amount which their com- 
petitors paid, and impose similar costs on broadcaster-provided services. Since no 
auctions nave been held to date, it is not possible to predict the factors that will 
determine the price to be paid for particular spectrum, and thus we cannot say now 
what factors the FCC should consider in determining any fees which broadcasters 
would pay. The auction process will begin this year, while any new flexible uses 
under tne amendment are probably several years away. The FCC thus will have an 
ample basis on which to make an appropriate fee determination before broadcasters 
begm offering these new services. The FCC should also be left with some discretion 
so that it can use its fee-setting authority to promote the development of innovative 
services. If the level of fees is set too high, it will discourage broadcasters from pro- 
viding untested services and lead to inefilcient spectrum usage. The FCC should 
thus he encouraged to set fees at levels that will encourage new services, reserving 
the discretion to adjust them as particular services prove viable. 

Question. What impact might there be on federal government receipts from spec- 
trum auctions if broadcasters obtained the use of spectrum apart from their main 
channel signal at less than market rates? 

Answer. Probably none. If some bidders for auctioned spectrum do reduce their 
bids due to the potential of broadcaster-provided competitive services — and we think 
that is unlikely to occur — any revenue shortfall would certainly be made up from 
the fees which broadcasters would pay. Nothing we have said is meant to suggest 
that the fees assessed on broadcasters should be set at less than market rates. In 
any event, the auctions for PCS services, which are expected to be the primary 
source of revenue from the competitive bidding process, will occur beginning this 
year, long before broadcasters are able to ofTer significant new commercial services. 
The value of that spectrum, therefore, is unlikely to be affected by the prospect of 
some future broadcast ancillary services. To the extent that the question suggests 
that revenue generation should be considered as part of the determination of wheth- 
er the public interest supports the flexible use of broadcast spectrum, it would ap- 
pear to be inconsistent with the Congressional intent behind section 309(jXV) which 
oars the FCC from making any public interest determination based "on the expecta- 
tion of Federal revenues." 

Question. Section 309(j) of the Communications Act of 1934 requires auctions only 
for spectrum whose principal use involves compensation from subscribers. Should 
this distinction also be applied to the types of services offered by broadcasters on 
additional spectrum to be assigned to them? If this distinction is applied there, how 
should subscription or pay video services be treated? If consumers must pay for set 
top converters in order to receive even non-subscription services, should fees be ap- 
plied for those services as well? If, over time, broadcasters changed the nature of 
the service they were providing over newly assigned spectrum, snould the fee for 
the spectrum be adjusted accordingly? By what process? 

The principal use of broadcast spectrum, both spectrum currently assigned to sta- 
tions and any additional spectrum which may be assigned, will be the provision of 
free over-the-air broadcast service. Nothing in any flexible use proposal would 
change that; new services would be ancillary to broadcasters' main program service. 
Broadcasters would continue to be required to demonstrate that tney have served 
the public interest as they have been required to do since 1934. This is not to say 
that the nature of a particular broadcast service might not change. Digital tech- 
nology will make it possible for broadcasters to offer new and different types of mul- 



234 

timedia broadcast program services. The move to digital broadcasting which the 
flexible use proposal would advance will thus make available new types of informa- 
tion to all Americans. 

It should be noted that the FCC currently authorizes television stations to operate 
on a subscription basis, and, under section 309{j), this use of a broadcast license 
would not be subject to fee or auction. See 47 C.F.R. §§73.641—4. If consumers were 
required to purchase a converter or other equipment in order to receive a new serv- 
ice, that would not have the effect of making it a subscription service, just as the 
requirement that consumers purchase a television set in order to receive current tel- 
evision service does not make it anything other than a free service. Indeed, inexpen- 
sive set-top converters are contemplated as an alternative to the necessity of pur- 
chasing an expensive new receiver in order for consumers to enjoy the benefits of 
new digital services. 

As the amount and kind of new non-broadcast services provided by broadcasters 
change, the fees-that broadcasters would pay will probably fluctuate, depending on 
the value of the services provided and the amount of a broadcaster's spectrum that 
is devoted to these services. The FCC should be provided with authority to make 
these adjustments. 

Question. The amendment would allow radio and television broadcasters to use 
the spectrum assigned to them to provide a wide variety of services outside of their 
main channel signal. The only limitation that appears to exist in the amendment 
is the requirement that these services be "ancillary or supplementary to the pro- 
gramming services which they are authorized to provide." What is the effect of this 
limitation? What practical limits do the terms "ancillary" and "supplementary" im- 
pose on broadcasters? What services apart from the mam channel signal are broad- 
casters currently authorized to provide and how would the amendment change that 
authority? What limits would be appropriate to set on the kinds of services oroad- 
casters can offer over the spectrum assigned to them? 

Answer. We do not envision broadcasters offering any services "outside" of their 
main channel signal. In a digital transmission environment, the "bits" of informa- 
tion needed for non-broadcast services would be intermixed in the transmission 
stream with the "bits" of broadcast service information. There would be no separa- 
tion between the broadcast signal and the "other services" signal. 

Broadcasters are now authorized to provide a variety of services on subcarriers 
or in the television VBI, which also are part of the main channel transmission. The 
FCC's rules now allow television stations to provide a variety of telecommunications 
services in the VBI, including data transmission, teletext, paging, and distribution 
of computer software. 47 C.F.R. §73.646. Sub-carriers can oe used for any subsidi- 
ary communications service, including background music services, utility load man- 
agement, etc. Id. §§73.293 (FM), 73.665, 73.667 (TV).3 Among the services which 
broadcasters now provide in this manner are datacasting of stock quotes, the PBS 
National Datacast service, teletext services, and local data broadcasts to banks, re- 
tail stores, etc. The flexible use proposal would assure that this authority will be 
extended to permit uses of all parts of a broadcast signal for ancillary or supple- 
mental services. 

The major limitation on the services which a broadcaster could provide under the 
amendment is the requirement that any such services be in addition to its primary 
broadcast service. That alone will substantially limit the number and type of serv- 
ices that a station could provide. As a practical matter, the types of services which 
could be offered will be limited. There may be real technical, interference, and prac- 
tical limitations which would prevent broadcasters from ofTering certain services, 
even if they could, as a theoretical matter, be offered using broadcast spectrum. 
Other services may not be economically viable, particularly where there are estab- 
lished providers oi such services at competitive prices. There also may be particular 
licensing requirements for certain services which would make them impossible or 
unattractive for broadcasters to offer. 

However, any bar on broadcasters offering a particular class of services would 
seem to be inconsistent with the overall goal of H.R. 3636 of permitting any techno- 



3 Prior to 1983, the FCC restricted FM subcarrier uses to "broadcast related" services. In 
eliminating that restriction, the FCC found that there was no reason to believe "that the expan- 
sion of such permissible use would be inconsistent with the continued provision of quality, or 
even enhancea, FM service to the general public. Indeed, some parties have opined that the use 
of subchannels for commercial purposes could provide needed financing to marginal failing sta- 
tions, thus preserving the service for which the license was originally granted." Subsidiary Com- 
munications Authorizations, 53 RR 2d 1510, 1524 (1983). It recognized that "such services may 
be offered in direct competition with other non-broadcast, radio licensees." Id. The FCC also 
noted that "we are particularly impressed with the potential for additional communications serv- 
ices without the need for additional allocations of valuable spectrum." Id. at 1523. 



235 

logically and economically viable competitive service to be offered by any class of 
provider. The Bill is designed to promote competitive entry and to avoid having the 
government choose "winners" based on current market position or technology. We 
note that recent trade press reports indicate that some wireless voice providers are 
contemplating offering video program services. See "Wireless Industry Searches for 
Content to Drive Maricets," Communications Daily, March 4, 1994, at 3. If broad- 
casters were for some reason to be barred from entering.certain markets, fairness 
would dictate that the participants in those markets also be restricted from provid- 
ing broadcast-type services. We stress, however, that we do not believe that such 
restrictions goin^ either way would advance the public interest, and it would not 
be appropriate, m our view, to place any additional limits on the kind of services 
that Droadcasters could offer. 

Question. Pursuant to the Federal Communications Commission's (FCC's) pro- 
ceeding on advanced television systems, each television broadcaster has tentatively 
been allocated an additional 6 megahertz in order to broadcast and HDTV-quality 
signal. How would the amendment in ouestion affect the FCC's efforts to encourage 
the development of HDTV and other advanced television systems? Does the amend- 
ment fully preserve the FCC's authority to establish standards and regulations for 
the transmission of HDTV? 

Answer. Allowing flexible spectrum use would in no way compromise the FCC's 
efforts to encourace the development of HDTV and would fully preserve the FCC's 
authority to establish Standards and regulations for the transmission of HDTV. We 
believe that the FCC should go forward with the process of assigning broadcasters 
the additional spectrum needed for the provision oi ATV service. 

Rather than inhibiting the Commission with regard to its ATV proceeding, a flexi- 
ble use provision would simply direct the Commission to do what it is has already 
done for FM and TV service, that is, allow broadcasters to provide new^ ancillary 
services in addition to their video or audio program service. Indeed, the FCC, in its 
ATV proceeding, has already raised and received comment on the very issue of such 
additional services. See Advanced Television Systems (Third Report and Order/ 
Third Further Notice of Proposed Rulemaking), 7 FCC Red. 6924, 6968-69, 6980- 
81(1992); Advanced Television Systems (Second Report and Order), 7 FCC Red. 
3340,3361-62(1992). 

In fact, the FCC commented that "[s]uch ancillary uses, if technically possible, 
might be critical to successful implementation of ATV in its early stages, when re- 
ceiver penetration is low. We have previously permitted ancillary uses of this nature 
to help spur development of a new technology. On the other hand, we would not 
want sucn ancillary uses to predominate over the primary use of the channel." 7 
FCC Red. at 6981 (footnote omitted). Allowing broadcasters to offer new digital serv- 
ices in addition to their main program service would appear to strike just this bal- 
ance. Thus, the provision of other services in addition to broadcast service as the 
television industry and consumers convert to ATV technology is fully consistent with 
the FCC's HDTV authority. Given the enormous financial commitment and market 
uncertainties that are associated with the development of any digital broadcasting 
service, if the spectrum for that service is not assigned to existing broadcasters and 
they are not permitted to make the most effective use of that spectrum as ATV serv- 
ice, it is unlikely that any advanced system of over-the-air broadcasting will be im- 
plemented, and the goal of providing universal advanced data services to the public 
would suffer. 

It should be noted, in addition, that no additional spectrum will be allocated to 
broadcasting in order to provide ATV service. The UHF bemd, on which the FCC 
expects ATV service to be provided, was allocated to television broadcasting in 1945. 
See Color Television Issues, 41 FCC 1, 2-3, 7 (1950). The FCC now only proposes 
to assign some of that spectrum to broadcasters for advanced television service. The 
FCC recognized that ^ajny spectrum needed for a broadcast ATV system will be ob- 
tained from the spectrum currently allocated to broadcast television." Advanced Tel- 
evision Systems (First Report and Order), 5 FCC Red. 5627 (1990). In large meas- 
ure, many of the channels that will be used to provide ATV service could not have 
been used to provide NTSC service consistent with the FCC's interference stand- 
ards. Neither the FCC's ATV proceeding, nor a provision encouraging flexible use 
of spectrum used for digital television service, would require any new spectrum to 
be allocated for broadcast service. 

Question. What are some of the commercial services that are currently techno- 
logically feasible if broadcasters are allowed to use the spectrum originally allocated 
to them for HDTV for services other than their broadcast service? Is this spectrum 
particularly well-suited for any specific commercial uses? 

Answer. Under the amendment, any non-broadcast services would be in addition 
to a broadcaster's main program service, just as broadcasters currently provide an- 



236 

ciliary services on subcarriers or in the VBI. No one has ever offered a digital broad- 
casting service. It is therefore difficult to predict which services will prove to be 
compatible with that service or viable in the marketplace. Some of the types of serv- 
ices that we currently envision being offered are "program enhancement" services 
which would offer viewers information supplementing a broadcast program (such sis 
team or player statistics during a sporting event, background information on people 
in the news, etc.); multiple video services; broadcasts of school-closing and other 
emergency information on a "real-time" basis so that consumers could obtain this 
information at their convenience; electronic "newspapers" which could be provided 
to wireless fax machines or to other types of receivers; or medical information serv- 
ices broadcast in encrypted form only to doctors and hospitals. These services may 
well be advertiser-supported and thus free to the recipients, or it may be that some 
will best be offered on a subscription basis. 

Since any particular block of spectrum may be used for any purpose, there is no 
inherent advantage to broadcast spectrum, in and of itself, for any particular serv- 
ice. As we explained above, however, there are obvious technical and economic con- 
siderations that will govern broad-casters' choice of services to offer. 

Question. Under the FCC's proceeding on advanced television systems, the addi- 
tional spectrum to be assigned to broadcasters would not require the issuance of 
new licenses. If broadcasters use this spectrum for services other than HDTV serv- 
ice, how should such services be regulated and should broadcasters be required to 
obtain a separate license for such service? 

Answer. Under current law, if a broadcaster provides an ancillary service that 
would be subject to separate licensing or re^latory requirements, they must complv 
with all of those requirements before offering the service. For example, if a broad- 
caster proposes offering on a subcarrier or in the VBI a common carrier service sub- 
ject to section 214 of the Communications Act, it would be required to make a sepa- 
rate section 214 application to the FCC for that purpose. Similarly, if the service 
offered by a broadcaster would be subject to state regulation, it must also comply 
with those requirements. The same construct would apply to these new services; 
broadcasters would be required to comply with any regulations or requirements ap- 
plicable to the services they propose to provide. 

In other services, the FCC; has encouraged the development of new and expanded 
or more efficient uses for already allocated spectrum without either imposing new 
regulatory requirements or requiring the return of spectrum. In the Specialized Mo- 
bile Radio Service (SMR), the FCC authorized licensees to begin oftering cellular 
telephone, paging, and dispatch services in a digital form within the existing SMR 
spectrum. Fleet Call, Inc., 6 FCC Red. 1533 (1991), see also Future Development 
of SMR Systems (Notice of Proposed Rulemaking), 8 FCC Red. 3950 (1993). Simi- 
larly, cellular operators were authorized to provide a range of services that were not 
contemplated wnen their licenses were initially granted, See 47 C.F.R. § 22.930. Cel- 
lular operators are now also beginning to convert their operations from analog to 
digital transmission. When this conversion is completed, the capacity of each opera- 
tors assigned spectrum will have been dramatically increased. No effort has oeen 
made by the Commission, however, to recapture any of this spectrum or to reauire 
the licensing of additional operators in the cellular band. We Delieve that the FCC 
acted correctly in these instances and no different treatment should be accorded 
broadcasters as they develop new uses of their spectrum that are consistent with 
their license obligations. 

Question. To the extent that broadcasters offer additional video programming 
services apart from the main channel on spectrum assigned to them for HDTV serv- 
ice, should such services be accorded must carry rights by cable operators? 

Answer. The Cable Act excludes from must carry requirements non-program-re- 
lated services transmitted by broadcasters on an ancillary basis. 

Question. To the extent that a new service offered by a broadcasters is similar 
to its existing main channel signal, would this new service be considered "broadcast- 
ing" under Section 3(o) of the Communications Act of 1934 and therefore subject to 
the requirements of Title III of the Act? This may not be a concern if the ancillary 
service is data transmission, but if it is an additional video channel, the language 
of the amendment could effectively exempt that service from the requirements of 
Title m (for example, the equal time rule, the personal attack rule, equal employ- 
ment opportunity requirements, children's television programming requirements, 
character review, etc.). Please comment. 

Answer. The FCC retains discretion to determine whether a particular service 
should be regulated under Title III, and thus subject to the regulations mentioned 
in the question. The FCC has concluded that if a service is free and generally avail- 
able to consumers, it is a broadcasting service; otherwise, it is not. Therefore, we 
expect that any broadcasting services, as defined by the FCC, that are provided by 



237 

broadcasters in' addition to their main pro-am service would also be subject to Title 
III regulation. 

Question. Under existing law, broadcast frequencies are available to all based on 
a competition which considers public interest factors such as diversity of ownership 
and ownership by minorities. The amendment could be read as eflectively reallocat- 
ing spectrum without taking such minority and diversity concerns into consider- 
ation. Please comment. 

Answer. Allowing flexible use would not reallocate any spectrum. It would merely 
authorize the use of spectrum allocated to broadcasting for almost 50 years for addi- 
tional purposes made possible by advances in technology — purposes which are fully 
consistent with provision of broadcast service. 

The FCC concluded that initially restricting the availability of ATV channels to 
existing television broadcasters "is the most practical, expeditious, and non-disrup- 
tive way to bring improved service to the American public." Advanced Television 
Systems (Second Reoort and Order), 7 FCC Red. 3340, 3342^3(1992). Also, the 
Fee's long-standing broadcast ownership policies have encouraged the growth of mi- 
nority-owned broadcast stations throu^ tax certificates, minority preferences in li- 
censing decisions, the distress sale policy, capital formation incentives for financing 
minority purchases of stations, and other policies. Those policies would continue in 
effect. 

Question.Nothing in this proposal would appear to restrict or limit the proportion 
of spectrum that broadcasters would be able to devote to services apart from its 
main channel signal. This leaves open the possibility that the broadcast-related 
service could become a minor part of^ a broadcaster's overall services. Should broad- 
casters be required to devote a minimum percentage of their spectrum to their 
broadcast license operation? 

Answer. The level of broadcast service in a digital system will not be dependent 
upon a specified percentage of the broadcast spectrum being used at any moment 
for that service. A "talking head" program might require only a small percentage 
of the total digital bit stream, while full motion video might occupy virtually all of 
the transmission capacity. Broadcasters will maintain a full broadcast service on 
each channel that they are assigned, and we accept that the opportunity to provide 
new services is contingent upon continuing to provide that service. 

Setting fixed percentages or other bright line tests would only inhibit the FCC's 
authority to adopt standards which reflect rapidly changing technology. While no 
one knows what the elements of tomorrow's ATV broadcasts will be, it is reasonable 
to expect that consumers will grow to demand more, rather than less, of broad- 
casters as they are exposed to the multimedia services of other providers. Therefore, 
no further regulatory requirements are needed, and any efforts to restrict the dy- 
namic use of the available spectrum will only reduce the potential efficiencies H.K. 
3636 seeks to realize, and limit the variety and types of services that the public can 
enjoy. 

Question. If broadcasters are given flexibility to offer multiple digitally transmit- 
ted video signals, wouldn't there be a natural incentive to reduce picture quality if 
that meant a broadcaster could transmit more channels of video? 

Answer. There is no likelihood that broadcasters would reduce the quality of their 
product, and there are ample regulatory tools in place to deal with any problem in 
the unlikely event that one arises. Reduced picture quality is simply not competi- 
tively viable in an environment where cable operators, MMDS systems, telephone 
companies, and DBS systems will all be offering high Quality video signals to con- 
sumers. In the face of all of these alternatives, the marketplace can be relied upon 
to discipline broadcasters when it comes to video quality. Further, the establishment 
of any digital transmission system requires the adoption of standards for both trans- 
mission and reception. Only the adoption of one national technical standard will 
convince equipment manufacturers to offer compatible consumer equipment, some- 
thing whicn the FCC's disastrous AM stereo experience confirms. Thus, a broad- 
caster could not unilaterally change the way in which its video services are trans- 
mitted and still expect that consumers could receive the service. Finally, should any 
{)roblems arise, the FCC has full authority under the Communications Act to estab- 
ish standards or to impose appropriate license conditions. 

Question. FCC regulations currently require a minimum level of service for tele- 
vision broadcasters of 2 hours per day or 28 hours per week, and for radio broad- 
casters of 12 hours per day. The amendment would appear to free broadcasters to 
provide services apart from their main channel signal on the entire spectrum as- 
signed to them during hours of the day that they are not broadcasting. This appears 
to create incentives for them to reduce their traditional broadcasting service to the 
public in order to expand any commercial services that prove more profitable than 
Dfoadcasting. Please comment. 



238 

Answer. The vast majority of broadcasters are dedicated to serving their commu- 
nities through their free, over-the-air signals. They realize that providing their main 
channel service is not only good for the public; it is also good business. In addition, 
both radio and television broadcasters must file for periodic license renewals which 
are subjected to strict scrutiny by the FCC and are subject to petitions to deny or 
competing applications for the frequency. If a broadcaster did not continue to pro- 
vide a fuU broadcast service througnout its license terimi, it would face a real possi- 
bility of losing its license at renewal. Even though the minimum hours of operation 
specified in the FCC's rules would permit reduction in the hours of service, it is un- 
likely that broadcasters would curtail their current service levels. If, however, the 
Congress or the FCC ever become concerned about broadcasters operating enough 
hours to serve the public interest, the FCC has ample authority to raise the stand- 
ards. 

Senatx)r Mathews. Thank you, Mr. Loewen. 

Our second presenter is Mr. John Siegel, senior vice president of 
Chris-Craft/United Television, San Francisco. Mr. Siegeh 

STATEMENT OF JOHN SIEGEL, SENIOR VICE PRESIDENT, 
CHRIS-CRAFT/UNITED TELEVISION 

Mr. Siegel. Thank you. I am also chairman of the NAB tele- 
vision board of directors, and I am appearing here today represent- 
ing both NAB and INTV, the Association of Independent Television 
Stations. My colleague Ron Loewen has laid out our general views 
on this outstanding legislation which is the subject of this hearing. 
My task is to focus on some amendments we believe are needed 
and to affirm our willingness to work with this committee to pass 
this much-needed legislation. 

In our view, the legislation must include explicit provisions to en- 
sure nondiscriminatory common carrier access to any Telco's video 
transmission capacity. This is a competitive necessity for both con- 
sumers and providers of such services. The final bill must also con- 
tain effective provisions against anticompetitive behavior, including 
swift enforcement with strong penalties. Deterrence is imperative. 

Now, I will focus on spectrum flexibility and respond to a number 
of misstatements. 

Your provision in S. 1822 dealing with spectrum flexibility recog- 
nizes that broadcasters, once we become digital, can provide con- 
sumers with additional services. Yet the legislation currently limits 
those services to only those that are "program related." Your legis- 
lation is designed to encourage as much competition as possible in 
order to better serve the public. Therefore, it seems entirely con- 
sistent with that policy to provide broadcasters with the tools to 
compete in this new information distribution environment. 

We will be facing more competition than ever before from cable, 
telcos, satellites, and others. This legislation seeks to allow the 
maximum amount of competition, and that means giving broad- 
casters the spectrum flexibility to provide ancillary and supple- 
mental services. 

These services will not replace the public interest-based service 
that radio and television broadcasters provide. The FCC will still 
renew licenses based on our public interest activity. Any failure to 
meet our public interest obligations will lead to the loss of our li- 
cense, and with the loss of our license, so go any ancillary and sup- 
plemental services. 

Now, let me address the subject of fees in the context of spec- 
trum flexibility. In our view, the FCC should be given wide latitude 



239 

in establishing a fee schedule. The upper rate for a particular serv- 
ice should be established by the auction price. Yet if a broadcaster's 
services are offered free to the public, then no fee should attach. 

If, on the other hand, broadcasters begin providing subscription 
services, an appropriate fee for the provision of those services 
would be warranted. We note that the administration, through 
NTIA, recently laid out its own policy on such fees, which we be- 
lieve has merit and which we commend to the committee for care- 
ful review. 

Let me respond to some other criticisms that have been made. 

Some critics argue spectrum flexibility will lead to radio and tele- 
vision licensees abandoning our free over-the-air programming in 
favor of other services for which we could charge a fee. Nothing 
could be further from reality. Our license will continue to be re- 
newed based on our public interest programming, not on any ancil- 
lary or supplemental service. Congress and the FCC will not allow 
broadcasters to turn their backs on their primary service and be- 
come solely data transmission providers. 

Others argue that spectrum flexibility would deny opportunities 
for minorities and other under-represented groups. But such access 
is already provided for by the FTC in its current broadcasting li- 
censing system. Under that system, women and minorities are 
gfiven opportunities such as tax certificates, minority preferences in 
licensing, and others, to obtain broadcast spectrum. We continue to 
support those very FCC policies that encourage minority ownership 
and we see spectrum flexibility as providing better entrepreneurial 
opportunities for minorities and others. Furthermore, by keeping 
broadcasting strong we also help to avoid a world of information 
haves and have nots. 

Some people believe broadcasters will gain unfair advantage over 
other technology. The fact is, however, that these competitors are 
asking for no restrictions on their activities, only on ours. Since the 
aim of this legislation is to promote competition, this argument is 
nothing — nothing more than a red herring to disguise the fact that 
these other technologies simply do not want competition. 

In conclusion, thank you for including the concept of spectrum 
flexibility in your legislation. We believe, however, that this provi- 
sion should be broadened to allow broadcasters to participate more 
fully in the information highway. This position is consistent with 
the administration's view that such flexible use of broadcast spec- 
trum would promote spectrum efficiency and help develop new digi- 
tal consumer services, increasing the total benefit to society. 

S. 1822 is already an excellent bill, but it will be even better if 
it allows broadcasters an equal chance to provide the American 
people with new services in addition to our traditional free over- 
the-£iir programming they have come to depend upon for genera- 
tions. 

Thank you. 

Senator Mathews. Thank you, Mr. Siegal. Our next presenter 
will be Mr. Thomas Stroup, president. Personal Communications 
Industry Association. 



240 

STATEMENT OF THOMAS A. STROUP, PRESmENT, PERSONAL 
COMMUNICATIONS INDUSTRY ASSOCIATION (PCIA) 

Mr. Stroup. Thank you, Mr. Chairman. My name is Thomas A. 
Stroup, and I am president of the Personal Communications Indus- 
try Association, PCIA, formerly known as Telocator. PCIA rep- 
resents over 450 companies providing a wide range of wireless tele- 
communication services such as paging and cellular. PCIA is also 
the organization representing the participants pursuing spectrum 
opportunities to provide new, emerging forms of personal commu- 
nications services or PCS. 

PCIA very much appreciates the opportunity to testify before you 
today regarding the proposal to allow broadcasters to use a portion 
of their allocated spectrum for services other than the traditional 
advertiser-based programming. We would not oppose section 704 or 
similar provisions that would allow broadcasters the flexibility to 
provide additional services directly related to their programming 
authorization as long as such use aid not detract from their ability 
to meet their primary obligations associated with their specific li- 
censes to provide current or advanced HDTV services. 

The association would, however, vigorously oppose any intrusion 
into areas in deviation of that standard. In that regard, I suggest 
that the committee clarify the meaning, the specific meaning and 
intent, of the language of section 704, describing permissible serv- 
ices to exclude commercial mobile services and other services it 
may not want provided by broadcasters. 

The reality of the situation is that broadcasters have been work- 
ing to achieve the broadest possible interpretation of this and 
somewhat similar language being considered in the House. This in- 
terpretation would allow broadcasters to provide commercial mobile 
services such as paging, PCS, and other wireless services using 
spectrum allocated for HDTV. PCIA's real concern lies in the im- 
pact of such a change on the wireless telecommunications industry, 
where negative results will be quite obvious. 

First, through implementation of much of the work done by this 
committee and its House counterpart last year, the FCC has pro- 
moted competition in the wireless industry through its regulatory 
parity doctrine. This foundation is dangerously undermined if 
broadcasters are guaranteed winners by having spectrum given to 
them for another purpose available for their exclusive use to pro- 
vide PCS services. 

It is essential that there be consideration of the public interest 
value of one use of spectrum over another. Too broad a grant of 
flexibility would allow one group of licensees, in this case broad- 
casters, to substitute their judgment for that of the FCC. Moreover, 
broadcaster CMS spectrum would replace the auction environment 
in which a finite and precisely defined number of spectrum oppor- 
tunities are available with an environment in which the number, 
scope, and spectrum capacity of competitors is unknown and fluid. 

This heightened uncertainty increases the risk of starting and 
operating new PCS businesses which will make obtaining financing 
for small businesses even more difficult. And, as you will recall, 
one of the goals established by this committee in granting the FCC 
auction authority was that small businesses be afforded an oppor- 
tunity to participate in the PCS auction process. 



241 

Second, the revenue derived by the Federal Government for spec- 
trum auctions for commercial mobile services will be significantly 
diminished if broadcast licensees are permitted to convert broad- 
cast spectrum to CMS, even if such conversion requires payment 
of a fee. To the degree that there is more spectrum and additional 
competitors in each market, the value of licenses is reduced below 
what licensees would have been willing to pay for a more limited 
commodity in a market with fewer competitors. 

Third is the question of what, if anything, broadcasters would be 
charged for their guaranteed CMS license and service. Because of 
the substantial number of variables, including different license 
areas and frequencies licensed, the process of creating an appro- 
priate fee will entail years of rulemaking and litigation, and in the 
end it will still be subject to the uncertainty of what the value 
would have been if the spectrum were licensed through the auction 
process. 

PCIA urges that you bear in mind the destabilizing impact of 
broad delegation of authority to allow broadcaster use of spectrum 
to provide wireless telecommunication services. Additional clarifica- 
tion of section 704 is needed, such as prohibiting conversion to pro- 
viding commercial mobile services, as defined by section 332(c) of 
the Communications Act, or by requiring that ancillary services be 
indivisible from the use of the frequencies for advanced television 
services, as recommended by the House Energy and Commerce 
Committee yesterday. 

The broadcasters have made their intentions clear. Consequently, 
it would be wise if the Senate Commerce Committee made its in- 
tended uses of section 704 specific and unambiguous. 

Thank you. 

[The prepared statement of Mr. Stroup follows:] 

Prepared Statement of Thomas A. Stroup 

My name is Thomas A. Stroup, and I am President of Personal Communications 
Industry Association (PCIA), formerly known as Telocator. PCIA represents over 
450 companies providing a wide range of wireless telecommunications services. In 
addition to representing existing forms of wireless, personal communications serv- 
ices, such as paging and cellular, -CIA also is the premier organization representing 
the full range of participants pursuing spectrum opportunities to provide new, 
emerging forms of Personal Communications Services, or PCS. 

PCIA very much appreciates the opportunity to testify before you today regarding 
the proposal contained in Section 704 of S. 1822 to allow broadcasters, who share 
the radio spectrum with many of the rest of us, to use a portion of their allocated 
spectrum lor services other than the traditional advertiser-based programming. 
PCIA is not an expert in either the market structure or technology of broadcasting. 
Accordingly, we cannot express any informed opinion on the merits of allowing 
broadcasters to provide services "related to the programming services they are au- 
thorized to provide" with their allocated spectrum, as S. 1822 provides. We would 
not oppose Section 704 or similar provisions that would allow broadcasters the flexi- 
bility to provide additional services directly related to their programming authoriza- 
tion, as long as such use did not detract from their ability to meet their primary 
obligations associated with their specific licenses to provide current, or advanced 
HDTV services. The association would however, vigorously oppose any intrusion into 
areas in deviation of that standard. In that regard I suggest that the Committee 
clarify the specific meaning and intent of the language of Section 704 describing per- 
missible services to exclude Commercial Mobile Services (CMS), and other services 
it may not want provided by broadcasters. 

The reality of the situation is, however and unfortunately, that broadcasters have 
been working to achieve the broadest possible interpretation of this and somewhat 
similar language being considered in the House so tnat broadcasters are potentially 
allowed to provide Commercial Mobile Services such as paging, PCS and other wire- 



242 

less services, using spectrum allocated for HDTV. Although experts in that field 
have expressed concern about the impact on development and implementation of 
HDTV, PCIA's real concern lies in the impact of such a change on the wireless tele- 
communications industry, where negative results are quite obvious. 

First, through implementation of much of the work done by this Committee and 
its House counterpart last year, the FCC has promoted competition in the wireless 
industry through its regulatory parity doctrine. A key factor of this new regulatory 
environment is the mandated auctioning of spectrum licenses for the provision of 
Commercial Mobile Services, such as PCS. This foundation is dangerously under- 
mined if broadcasters are guaranteed winners by having spectrum given to them for 
another purpose, available for their exclusive use to provide PCS services. The Com- 
munications Act of 1934 gives the FCC the authority to allocate spectrum for spe- 
cific purposes and to establish market structures, such as the number of licenses 
to be assigned to particular services and the amount of spectrum that will make 
those markets function. Permitting broadcast licensees to unilaterally convert spec- 
trum from broadcasting to commercial mobile radio purposes would undermine that 
process. In any allocation proceeding, it is essential that there be consideration of 
the public interest value of one use of spectrum over another. Too broad a grant 
of flexibility would allow one group of licensees — broadcasters — to substitute their 
judgment for the FCC's. Under this new competitive environment, the rules say that 
licenses for Commercial Mobile Services are to be assigned through a competitive 
bidding process, now being implemented by the FCC. This competitive bidding proc- 
ess involves not only payment of a fee for licenses, but also an opportunity for all 
persons qualified to provide a Commercial Mobile Service to compete at auction, for 
the available licenses. Even if broadcasters are required to pay some sort of "acqui- 
sition fee" for broadcast spectrum converted to use providing Commercial Mobile 
Services, other entities, capable and prepared to offer the same service would have 
no opportunity to compete for the "newly minted" Commercial Mobile Service spec- 
trum. That is the antithesis of competition. There is no legitimate public policy ra- 
tionale to confer a guaranteed grant of spectrum to broadcasters for non-broadcast 
purposes. 

Moreover, broadcaster CMS spectrum would replace the auction environment in 
which a finite and precisely defined number of spectrum opportunities are available 
with an environment in which the number, scope and spectrum capacity of competi- 
tors is unknown and fluid. This increased uncertainty increases the risk of starting 
and operating new PCS businesses, which will make obtaining financing for small 
businesses even more diflicult. And, as you will recall, one of the goals established 
by the Committee in granting the FCC auction authority was that small businesses 
be afforded an opportunity to participate in the PCS auction process. 

Secondly, the revenue derived by the federal government from spectrum auctions 
for Commercial Mobile Services will be significantly diminished if broadcast licens- 
ees are permitted to convert broadcast spectrum to CMS, even if such conversion 
requires payment of a fee. To the degree tnat there is more spectrum and additional 
competitors in each market, the value of licenses is reduced below what licensees 
would have been willing to pay for a more limited commodity, in a market with 
fewer competitors. Thus the entire spectrum auction market value is eroded and 
there is a very real likelihood that the PCS spectrum auctions will not generate the 
revenue being projected for the U.S. Treasury. 

Thirdly is the question of what, if anything, broadcasters would be charged for 
their guaranteed CMS license and service. Because of the substantial number of 
variables, including different license areas and frequencies licensed, the process of 
creating an appropriate fee will entail years of rulemaking and litigation. 

Some degree of flexibility for broadcast licensees, consistent with the public inter- 
est, may be warranted. Shortly after debate on the issue in the House Telecommuni- 
cations and Finance Subcommittee, PCIA contacted the National Association of 
Broadcasters to invite them to participate in discussions on whether their needs and 
our own concerns could be mutually accommodated. Although the response was po- 
lite, it was also an unequivocal refusal. 

Consequently, PCIA remains open to resolving this issue. As your Committee 
moves ahead on this issue and the other provisions of S. 1822, PCIA urges that you 
bear in mind the destabilizing impact of broad delegation of authority to allow 
broadcaster use of spectrum to provide wireless telecommunication services. It has 
become apparent additional clarification of Section 704 is needed, such as prohibit- 
ing conversion to use providing Commercial Mobile Services (as defined by Section 
332(c) of the Communications Act). The broadcasters' association has made its in- 
tentions clear. Consequently it would be wise if the Senate Commerce Committee 
made its intended uses of Section 704 specific and unambiguous. 



243 

Senator Mathews. Thank you. The next presenter is Mr. Robert 
Rast, vice president of HDTV Development. 

STATEMENT OF ROBERT M. RAST, VICE PRESIDENT, HDTV 
BUSINESS DEVELOPMENT, G.I. COMMUNICATIONS DIVISION, 
GENERAL INSTRUMENT CORP. 

Mr. Rast. Thank you, Mr. Chairman. I am pleased to be here 
today representing Gfeneral Instrument, a company that is very in- 
volved in the digital television era in the United States, and more 
specifically in the advanced television standardization process. 

Our company is the one that achieved the all-digital break- 
through in the HDTV process that allowed the United States to 
jump into the lead in the world in high definition television. We are 
a member of the Digital HDTV Grand Alliance along with AT&T, 
the Massachusetts Institute of Technology, Philips Electronics 
North America, David Sarnoff Research Center, Thomson 
Consumer Electronics, and Zenith Electronics. 

Together, these seven companies are occupied with building a 
prototype of what we call the "best of the best" HDTV systems, in- 
corporating the best features of the four systems that existed be- 
fore. That system should be tested this fall, and should be the basis 
for an HDTV standard to be set by the FCC next year. 

We have four points we would like to make today. The first is 
that the broadcaster commitment to public service free over-the-air 
broadcasting of the highest practical quality must be preserved in 
any action that is taken. It has been true that the current channels 
that are used are predominantly used for provision of free over-the- 
air broadcasting, and we advocate that the new ATV simulcast 
channels that will be given out also be dedicated predominantly to 
free over-the-air broadcasting of the highest practical quality. 

Second, we believe that the work in digital HDTV, which is real- 
ly a role model for Grovernment-industry cooperation, is deserving 
of the continuing support of Congress. The Congress and the FCC 
have worked together to develop an advanced television service 
that has come to be focused on high definition television. The FCC 
established an advisory committee on advanced television service 
in 1987, with Dick Wiley as the chairman. 

For the past 7 years, many companies have labored voluntarily 
in the advisory committee to develop an advanced television serv- 
ice. In 1990, our company entered the competition with the first 
proposal for an all-digital svstem, and that has carried the day. 
Other companies soon switched, and it is now clear that the new 
advanced television service will be digital high definition television, 
and the seven companies that I mentioned are working together to 
bring that to fruition. 

We think that what has happened is a role model for the kind 
of Grovemment-industry cooperation that is needed to establish new 
technologies and to push the United States into leadership posi- 
tions in technology in the world, and so we suggest that the digital 
HDTV standardization effort is worthy of your support. 

The third point we would like to make is that broadcasters 
should be permitted to offer additional services, but only to the ex- 
tent that such services do not conflict with their public service obli- 



244 

gations and that such services be minority uses of the channels, 
and that those services not conflict with quality HDTV service. 

We agree with comments made already that the permitted serv- 
ices do not have to be restricted only to those that are program- 
related. The system that the grand alliance system has proposed is 
going to offer a 20-megabit-per-second data pipe into the home. It 
is a veritable fire hose of bits and bytes pouring into the home with 
all kinds of information, dominantly to be used for a quantum leap 
in television performance, but witn plenty of bits and bytes leit 
over to support the kinds of services people are talking about. 

The fourth point we want to make is that there is a concern that 
the same technology that enables five times the information in 
each televion picture, providing television pictures with 35-millime- 
ter film quality, can also be used to instead send multiple iter- 
ations of today s television, so you could ^et from 5 to 10 channels 
in that channel rather than a higher quality signal. 

In such a case it would be possible to take a single one of those 
channels and discharge the public service obligation, so that a frac- 
tion of the capacity would be used for the public service obligation 
and the predominant use of the channel could become commercial 
services, other television services which could be subscription and 
pay. 

We suggest that that is not the intent of advanced television 
service in the United States, and that is not consistent with the ob- 
ligation for free over-the-air television service, and we suggest that 
people look at the legislation to try to ensure that that does not be- 
come the case. 

In such a case it is very unclear — if it were true that one were 
to use the channel in this way, it is very unclear that it would be 
in the public interest to grant those channels to broadcasters, and 
if broadcasters believed that a digital representation of the current 
service is adequate, one could consider taking a single channel and 
placing on it digital representations of the current services pres- 
ently carried on a number of channels, and thus free up many of 
the advanced television channels for the kinds of services that 
would be in the public interest such as digital HDTV. 

In looking at providing much more than we have ever had before, 
we want to make sure it is just not more of the same. We would 
like broadcasters to be all they can be, but not more than they 
should be. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Rast follows:! 

Prepared Statement of Robert M. Rast 

Thank you Mr. Chairman. I am pleased to appear before you and the members 
of the committee on behalf of General instrument (GI), a company which has been 
deeply involved in the Advanced Television standardization process. GI achieved the 
all-distal breakthrough which put the United States on the map in the world of 
HDTV (high definition television), in the words of Roll Call, the General instrument 
development was the technological equivalent of the fall of the Berlin Wall. That 
is so because, in going all-digital, entertainment television gains technological parity 
with computers and telecommunications as linchpins in the evolving National infor- 
mation infrastructure. 

General instrument is a member of the Digital HDTV Grand Alliance, along with 
AT&T, the Massachusetts institute of Technology, Philips Electronics North Amer- 
ica, the David SamofT Research Center, Thomson Consumer Electronics, and Zenith 
Electronics. The Grand Alliance is now occupied with building a prototype of what 



245 

we call "the best of the best" HDTV system. That system will be tested this fall, 
and will be the basis for an FCC HDTV standard which should be finalized in 1995. 

SUMMARY OF POSITION 

Because of General instrument's great interest in the future direction of broadcast 
television, we very much appreciate the oppwrtunity to present our thinking on Sec- 
tion 704 of S. 1822. The key points we wisn to make are: 

1. Broadcasters' public service commitment to free, over-the-air broadcasting of 
the highest practical quality must be preserved. That commitment and service enti- 
tle broadcasters to a privileged position in their use of the public airwaves. 

2. Congressional action on broadcast services should support and encourage the 
further development and standardization of digital HDTV. Under the leader^ip of 
the Congress and the FCC, tremendous progress has been made by the Advisory 
Committee on Advanced Television Service and the Digital HDTV Grand Alliance. 
The U.S., which had been out of the running in the global advanced television (ATV) 
comf>etition, has now vaulted into the lead. But, the race is not over. The positive 
momentum must be maintained, and we solicit your encouragement of our efforts. 

3. Broadcasters should be permitted to offer additional services, but only to the 
extent that such services do not conflict either with their public service commit- 
ment, or with a quality HDTV service. Permitted additional services do not have 
to be only those which are program-related. 

4. Digital video subscription and pay services are not consistent with broad- 
casters' public service commitment to free, over-the-air broadcasting, and should not 
be authorized on the ATV simulcast channels. Digital NTSC, having picture quality 
at or close to today's TV standard, offers only a limited performance improvement, 
and thus can be considered to be an advanced television service only in a limited 
sense. Digital multi-channel NTSC is a substitute for HDTV service, and as such 
would compete with HDTV if authorized on the same channel, implementation of 
both multi-channel NTSC and HDTV to time share the same channel would un- 
doubtedly slow the transition to HDTV. 

To what extent does General instrument's position reflect a consensus within the 
Grand Alliance? it is safe to say that a consensus exists on the first three points. 
There is, however, a diversity of viewpoints on the fourth point. 

All Grand Alliance members believe HDTV should be the priority ATV service, 
and the ultimate goal of an ATV transition. All members believe that digital NTSC 
services should not be allowed to preclude HDTV service. 

GI is not alone in believing that digital NTSC services should not be permitted, 
and GI may not have the strongest such viewpoint. More members believe that 
some flexibility may be appropriate, however, and that permitting broadcasters to 
offer digital NTSC service in hours when HDTV service is not required might facili- 
tate the transition to HDTV. One member believes that broadcasters should be al- 
lowed to implement digital NTSC service, on a free-to-the-consumer basis only, as 
rapidly as possible, and well before HDTV is available. Others are concerned that 
such an offering may not be practical. 

Thus, there is a diversity of viewpoints within the Grand Alliance as to whether 
digital NTSC should be a permitted service in the ATV simulcast channel. Dif- 
ferences of opinion are not new in the Grand Alliance. But, we constantly find ways 
to overcome such differences and to work together in pursuit of our common goal: 
The best possible digital HDTV service for the United States. 

FREE, OVER-THE-AIR BROADCAST SERVICE MUST BE PRESERVED 

Broadcasters have an excellent tradition of support of the public interest through 
free, over-the-air broadcast service. Broadcasters offer the most universal, and eco- 
nomical, television service in the United States. Broadcasters are also committed to 
local service, playing an important role in strengthening our communities. These 
public interest contributions have justified broadcasters having free access to a sig- 
nificant portion of spectrum to support their service. 

The technical standard defining today's television service is aging. The color 
NTSC standard was set 40 years ago. it has served us well, but digital technology 
can now allow significantly better service, in picture and audio quality, and in inter- 
ference-free reception. The transition to advanced television service is intended to 
provide a significant performance improvement. 

The transition to ATV service will be subsidized to the extent that broadcasters 
will have free access to a second channel during the transition period, i.e., they will 
not have to face spectrum auctions. A quid pro quo for that subsidized transition 
is a continued commitment to service in tne public interest. 



246 

Some broadcasters, leery of the risks inherent in a significant step in technology, 
might rather take a smaller step. They are concerned with the initial high cost of 
HDTV receivers, and how auickly the service will be embraced by consumers. But, 
granting a free additional channel to broadcasters for the transition is a subsidiza- 
tion intended to ameliorate the risks. Taking a lesser step would be to seek the re- 
ward without the risks. Further, an implication of too small a performance improve- 
ment now is that the new standard would be short-lived. 

DIGITAL HDTV SHOULD BE SUPPORTED AND ENCOURAGED 

The FCC standards setting process, having fostered cooperation and progress be- 
tween government and industir through its Advisory Committee, is a positive role 
model for such collaboration. T^he rewards are technology innovation, economic op- 
portunity, and high-skill, high-wage jobs, all at minimal expanse to the government. 
The government, and nation, have gained the benefit of private industry investment 
in a cumulative amount of about $200 million, in return, the companies which have 
made that investment request that the government maintain its support of our ef- 
forts, and continue to pursue the stated goal: an HDTV broadcast standard. The 
Grand Alliance would certainly be appreciative of continuing encouragement and 
support from the Congress. 

In July, 1987, in response to a joint petition from 58 broadcast-related parties, 
the FCC opened an inquiry to explore the possible introduction of an advanced tele- 
vision service. This proceeding has been unusually long, lasting almost seven years 
already. We would like to believe the end is in sight. 

in March of 1990, as part of the proceeding, tne FCC announced some key deci- 
sions, including an intent to consider simulcast HDTV ahead of EDTV (enhanced 
definition television), thus signaling a clear preference for the hi^er performance 
of HDTV. The Commission also expressed a preference for all-digital technology, but 
conveyed its understanding that such technology would not be available for a num- 
ber of years. The FCC documented those decisions in its Report & Order of August 
24, 1990. 

In June of 1990, the FCC having declared in favor of HDTV, General instrument 
entered the standards competition with the world's first all-digital HDTV system 
proposal. That announcement was a defining moment in the ATv standards process, 
and the shock waves are still reverberating around the world. The reaction was 
swift within the United States. Within seven months, three of the other five compet- 
ing systems switched to all-digital. 

Naysayers abounded, especially overseas. Some Europeans continued to defend 
their selection of analog HDTV technology by declaring that all-digital was still ten 
years away. During 1992, however, four all-aigital HDTV systems were successfully 
tested at the Advanced Television Test Center in Alexandria. All-digital is now 
taken seriously everywhere. Engineers in Europe and Japan are hard at work play- 
ing catchup. 

In February, 1993, the Advisory Committee, pondering test results on the five re- 
maining systems, eliminated the last analog system, the Japanese Narrow MUSE 
system, and carried over the four all-digitai systems for furtner testing of claimed 
improvements. At the same time, the Advisory Committee endorsed the concept of 
the proponents getting together to merge their technologies into a "Grand Alliance" 
system, which would permit the best features of the systems to be combined into 
a single "best of the test" system. After arduous negotiations, the Digital HDTV 
Grand Alliance was announced in May, 1993. 

During the balance of 1993, the Grand Alliance focused on completing the defini- 
tion of its system and obtaining Advisory Committee approval of its system pro- 
posal. That has been accomplished and the Grand Alliance prototype is now under 
construction for testing by the Advisory Committee this fall. Following testing, the 
Advisory Committee should make a recommendation to the FCC during the first 
Quarter of 1995. The FCC is expected to finalize the HDTV standard during the 
tnird quarter of 1995, and commercial service could start as early as late 1996. 

Members of the Digital MDTV Grand Alliance have made very substantial invest- 
ments in support of a clear direction from the FCC in favor of HDTV. GI did not 
even enter the competition until it was clear that HDTV was the favored approach. 
Upon entering, GI made a fundamental and enabling contribution. It is noteworthy 
that GI is not an industry giant, nor a traditional broadcast supplier. Break- 
throughs often happen from such companies, if the government were to waffle and 
waver now, companies like GI will be discouraged from participating in future simi- 
lar attempts at government/industry cooperation. 

In Europe, D2-MAC and HD-MAC are dead. Europe is trying to define its digital 
future. Some in Europe are reaching out, wanting to cooperate in development of 



247 

a world standard. Others remain insular. There are opportunities, but they must 
be pursued. 

In Japan, the analog, satellite-only MUSE system has not been very successful. 
Within the last few weeks a key Japanese government official declared MUSE to 
be dead, and that the Japanese need now to develop a digital replacement in co- 
operation with Americans. While the statement was quickR^ retracted, its truth is 
apparent. Thus there are opportunities in Japan also, out they must be developed. 

The digital HDTV technology of the Grand Alliance opens potential opportunities 
around the world. But, those opportunities must be vigorously pursued, and doing 
so requires the validation of a LJ.S. digital HDTV standard in a timely manner. 

NON-CONFLICTING ADDITIONAL SERVICES SHOULD BE PERMITTED 

The technical potential of the Grand AlUance digital HDTV system to support new 
services dwarfs the potential of today's analog television technology. The Grand Alli- 
ance system will provide a 20 Mbps one-way data pipe to the home, which can be 
organized in limitless ways. That oata rate is about 10,000 times the data rate sup- 
ported by typical personal computer modems. The packetized transport system can 
support many difierent services simultaneously, with blocks of data for individual 
services shipped in separate packets which include special name tags, i.e., headers 
and descripters, to identify and detail the service. 

While most of the 20 Mbps data capability would be allocated as a first priority 
to HDTV service, a significant amount of capacity, perhaps 1 Mbps, could be dedi- 
cated to additional services. An even greater capacity could be available for addi- 
tional services, as long as the data fiow was interruptible to support momentary 
peak demands by the HDTV service. During scene changes in the picture, or during 
substantial motion in the picture, the HDTV service will need the full capacity. At 
other times some of the capacity could be dynamically allocated to additional serv- 
ices, with no loss of picture quality. For example, during a still picture, more than 
half of the channel's data capacity could likely be allocated to additional services. 
For example, during a televised sporting event, current sports scores and perform- 
ance statistics could be downloaded as a data stream whenever the camera dwells 
momentarily on a scoreboard. 

Digital HDTV is the broadcasters' ticket to the NH (National Information infra- 
structure). High definition entertainment and other services over-the-channel will 
be key contributers to an evolving NIL The availability of such a large data trans- 
mission capability to the home will be an important factor in future communications 
to consumers. 

Broadcasters should be permitted, and encouraged, to offer services which take 
advantage of the HDTV data transmission capability, and which do not replace or 
reduce tJie Quality of the HDTV service. Such services should not have to be pro- 
gram-relatea. 

DIGITAL NTSC SHOULD NOT BE AN ATV SERVICE 

Digital NTSC offers only a limited performance improvement over analog NTSC. 
As used here, digital NTSC, embraces video in which the resolution is approxi- 
mately equivalent to NTSC, the current television standard. Since such performance 
falls substantially short of the performance obtainable in HDTV, it is unlikely to be 
enduring as a standard in place of HDTV. 

If digital NTSC were to be accepted as an ATV service, then broadcasters could 
satisfy their public service commitment with a single, free over-the-air digital NTSC 
program. That program could occupy less than 20 percent of the available data ca- 
pacity in the TV channel. The broaacaster could then allocate in excess of 80 percent 
of the channel's data capacity to commercial opportunities such as subscription or 
pay programming, which are not part of the broadcaster's public service, m other 
words, the broadcaster would have been granted an ATV simulcEist channel to serve 
the public interest, and would have to dedicate only of fraction of the granted capac- 
ity to meet that requirement. That does not seem right. 

Alternatively, if broadcasters claim that digital NTSC is an ATV service, and that 
a digital NTSC signal could be used in an ATV simulcast channel to fulfill the pub- 
lic service commitment to free, over-the-air broadcast sendee, then the answer is 
clear: Broadcasters could share a single ATV simulcast channel, each providing a 
digital NTSC simulcast feed of its NTSC analog channel feed. Sharing a channel 
would be efficient, and make additional spectrum available for the public good. 

To the extent that broadcasters wish to offer digital NTSC subscription and pay 
services, they do not have to use ATV simulcast channels, but rather could partici- 
pate, as would other prospective users of the spectrum for commercial services, in 
the auction process. 



248 

Allowing broadcasters to ofTer digital NTSC services may threaten the FCC's abil- 
ity to accomplish the transition to ATV service and to reclaim one of the two simul- 
cast channels. To the extent that digital NTSC is ofTered over-the-air, and consumer 
hardware penetrates the market, be it whole receivers or adapter boxes, demand for 
NTSC service will be perpetuated, and a whole new set of consumer hardware, sub- 
ject to being obsoleted hy a standards change, will exist. 

Other adoitional services contemplated for use in the ATV channel tend to be an- 
cillary or supplementary to the HDTV service, coexisting with that HDTV service. 
Multichannel NTSC, however, is a substitute for HDTV, and competes with HDTV. 
Sharing HDTV and multichannel subscription NTSC in a channel would provide 
broadcasters with an incentive against HDTV service, to the extent that broad- 
casters could market multichannel to subscribers for a fee. That would certainly 
slow a transition to HDTV service. 

Senator Mathews. Thank you, Mr. Rast. 

Our final panel this morning is Mr. Andrew Jay Schwartzman, 
executive director of Media Access Project here in Washington. Mr. 
Schwartzman. 

STATEMENT OF ANDREW JAY SCHWARTZMAN, EXECUTIVE 
DIRECTOR, MEDIA ACCESS PROJECT 

Mr. Schwartzman. Thank you, Senator Mathews. 

Before I begin, the NAB testimony included as an attachment 
the NAB's response to Chairman Markey's letter concerning the 
House version of spectrum flexibility. I also was solicited by the 
chairman of the House Energy and Commerce Telecommunications 
Subcommittee for a response. I would like to ask if mv March 12, 
1994 letter to Chairman Edward Markey could be included in the 
record. 

Senator Mathews. Without objection, it will be made a part of 
the record. 

[The information referred to follows:] 

Letter From Andrew Jay Schwartzman, Executive Director, Media Access 

Project 

March 12, 1994. 

The Honorable Edward J. Markey, 
U.S. House of Representatives, 
Washington, DC 20515-6119 

Dear Mr. Chairman: This is in response to your March 3, 1994 letter concerning 
Rep. Tauzin's "Broadcaster Spectrum Flexibility" amendment. i 

The provision would eliminate the competitive process presently required by Sec- 
tion 309 of the Communications Act and automatically give broadcasters, free of 
charge, the exclusive right to double the amount of spectrum they presently control. 
Four critical facts have gone unmentioned in the debate on the amendment: 

• It would overrule the Supreme Court's landmark Ashhacker case. That de- 
cision embodies the essence of democratic capitalism by directing the FCC to 
consider competing applications from all comers before granting the monopoly 
right to use scarce puolic spectrum. 

• It falsely presumes that incumbent broadcast licensees have a special claim to 
existing or new spectrum. Their licenses are temporary (5 years) and revocable. In- 
deed, Section 304 of the Conmiunications Act requires applicants to make written 
disclaimer "of any claim to the use of any particular freauency or of the electro- 
magnetic spectrum as against the regulatory power of the United States because of 
the previous use of the same. * * *" 

• It disenfranchises other citizens with equal or better claims to use scarce spec- 
trum. Unlike other mechanisms used for new spectrum licensing, the Tauzin 
amendment would authorize incumbent broadcasters to take dominion over addi- 



lAs you know, MAP seeks to promote the public's First Amendment rights to speak and to 
be heard in the marketplace of ideas. MAP does not generally speak in its own name, but this 
response to your solicitation ofTers perspectives MAP has gained in representing hsteners and 
viewers for more than twenty years. 



249 

tional spectrum without providing set-asides for small and rural businesses, minori- 
ties ana women [as in the case of auctions under Section 309(j)], or significant pref- 
erences for diversification and minority ownership [as in mass media lotteries under 
Section 308(i) and broadcast comparative hearings], 

• It permits broadcasters to abandon free service and offer HDTV and other ad- 
vanced services exclusively on a pay-TV or subscription basis. While supporters may 
claim otherwise, the simple fact is that under existing Reagan-era deregulation pob- 
cies, broadcasters can suspend free service at will on existing NTSC channels. Be- 
cause language in the Tauzin amendment prohibiting new reductions in service does 
not change present law, it has the effect of permitting unlindted pay-TV on new ad- 
vanced TV frequencies. Such services would also be exempt from equal time" and 
lowest unit rate requirements. 

The greediness of the National Association of Broadcasters in advancing this 
scheme is especially painful for those of us who have long fought for must-carry, 
retransmission consent, and other measures to protect and improve free, over-tar- 
air broadcasting. Our purpose in supporting these policies has been to insure a se- 
cure and profitable place for free broadcasting, including new entrepreneurs seeking 
to enter the industry. This amendment would lock up the spectrum for existing 
broadcasters and will reduce or even eliminate free TV for millions of Americans. 

In exchange for providing a modicum of public service, over-the-air TV has been, 
and remains, a protected and highly profitable business. The Tauzin amendment 
jeopardizes that service in many ways. Although broadcasters would receive an ex- 
traordinary new grant of twice as much spectrum space as they presently control, 
the amencunent creates no new obligations to serve tne public. Indeed, broadcasters 
would be able to use spectrum which has been withheld from willing competitors 
to operate services which would be exempt from "equal time," Children's TV Act, 
and other public interest obligations. It would permit initiation of pay-TV, paging, 
data transmission and other businesses even though there are numerous 
underrepresented voices willing to bring new and diverse viewpoints to the market- 
place of ideas via traditional free program services. And it would also shut out law 
enforcement, public safety, emergency services and other agencies which have anx- 
iously sought additional spectrum to maintain and improve public service. 

In light of these implications, your questions are extremely important. Here are 
our answers: 

Question. Should broadcasters bid and pay a spectrum fee if they provide new an- 
cillary services? 

Answer. We have historically opposed imposition of a spectrum fee for broadcast- 
ing, as opposed to other uses. We certainly do not believe that auctions are the best 
way to select trustees who will provide broadcasting service and administer political 
broadcasting rules. Thus, we would not support a fee, or auctions, for new broadcast 
services, whether they were provided as aavanced television services or as ancillary 
services. The exception to this principle would be if and when over-the-air pay-TV 
is permitted; fees are appropriate under such circumstances. 

This answer requires significant elaboration. The question presumes that broad- 
casters should be permitted uncompetitive access to additional spectrum, and that 
they should be allowed to provide "new services" on either present or newly-assigned 
frequencies without consideration of whether there are other, better uses and users 
of such spectrum. We do not believe that presumption is appropriate. Changing 
technology may make it possible to reallocate portions of the spectrum currently re- 
served for existing or advanced TV. New broadcasters, with new perspectives, and 
public safety users should have the right to establish that they could better serve 
the public. Auctions are a poor way to make policy as to the best uses of public spec- 
trum. Only after determination is made as to how the spectrum should be deployed 
should Congress or the FCC decide if fees and auctions are appropriate for the cho- 
sen purposes. 

Whenever a broadcaster seeks to cease providing broadcasting services on spec- 
trum licensed for broadcast uses, the spectrum should be immediately reassigned 
by whatever method Congress may choose. The incumbent broadcaster should be 
permitted to compete with all comers for the future use of this spectrum. 

We understand that supporters of the Tauzin amendment have argued that since 
advanced and ancillary services would be offered in a single digital bitstream, it is 
impossible to create a system placing control of "excess" spectrum (i.e., that which 
is not needed to provide "main channel" service) in the hands of others. That re- 
maricably self-serving prediction about technology which does not yet exist is actu- 
ally a red herring. While it may be necessary for broadcasters to be the "proprietor" 
of a digital transmission, they need not also control the services so provided. For 
decades, the industry has ceded control of its subcarriers for "Muzak," blind reading, 
data transmission and other services provided by third parties. The current fad of 



250 

"LMA's" is also based on the notion that broadcasters need not control what is car- 
ried over signals they transmit pursuant to contract. 

Question. How should spectrum fees be calculated? 

Answer. As noted in answer to the first question, we believe that fees should not 
be charged for broadcast services. Thus, the question requires making an assump- 
tion we would not make. 

The Tauzin amendment would mandate an impossibility. There is no way to es- 
tablish with precision the market value of a commodity where there is only one law- 
ful buyer. Thus, it will be necessary to use a mechanism tied to profitability, ^ross 
revenues or another reasonably objective measure. We do believe tnat if the decision 
is made to employ any device to establish a fee mechanism, it should take into ac- 
count the needs of new entrants, small market operators, and those who will serve 
the needs of otherwise underserved segments of the public. 

Question. What would be the impact on federal receipts if broadcasters providing 
ancillary services paid less than market rates? 

Answer. This question requires too many assumptions to permit a concrete an- 
swer. However, the implication of the question is indubitably correct; federal re- 
ceipts would surely be reduced. Entry of additional parties using newly available 
spectrum to provide non-broadcast services will distort the auction market created 
under Section 309(j) of the Communications Act. Such uncertainty would distort 
auctions for other spectrum. 

Question. Should auctions be limited to circumstances where broadcasters receive 
compensation for licensed spectrum? 

Answer. Assuming auctions were desirable, they should be employed for all non- 
broadcast uses as well as pay-TV services. Fees are inappropriate for converters 
used for "free" non-subscription services; such programming should be treated as 
broadcasting and subject to Title III obligations. As noted above, if broadcasters 
seek to change the nature of the service they are providing, they should be required 
to surrender the spectrum involved for reassignment under conditions permitting 
competition among all qualified applicants. 

Any full-time over-the-air home shopping service should be subjected to spectrum 
fees. 

Question. What present and future capabilities are permissible under the Tauzin 
amendment's limitation that services be "ancillary or supplementary to the pro- 
gramming services which they are authorized to provide." 

Answer. Broadcasters are presently permitted extremely limited "ancillary" use of 
sideband, subcarrier and TV vertical blanking interval elements of their signals. It 
is of critical importance to note that when these services have broadcasting charac- 
teristics, they are presently regulated as broadcasting under existing law. [The 
Reagan-era FCC attempted to permit evasion of this requirement, but its decision 
was reversed by the United States Court of Appeals for the D.C. Circuit. Teletext 
Services, 53 RR2d 1309 (1983), on reconsideration, 101 FCC2d 827 (1985), afPd in 
part and rev'd in part, IRAC v. FCC, 801 F.2d 501, rev'd denied, 806 F.2d 1115 
(D.C. Cir. 1986Xen banc), cert, denied, 482 (1987).] 

The very limited uses of ancillary services presently permitted should not be fur- 
ther extended. If broadcasters are permitted to provide ancillary services on newly 
licensed frequencies, they should be regulated under Title III. If subscription reve- 
nue is received, fees should be paid. If non-broadcast services are contemplated, the 
spectrum should be made available to others on a competitive basis. As is set out 
in response to question number one above, the fact that a single digital bitstream 
is employed should not preclude permit use and control of this spectrum by many 
others, with the benefits going to the public fisc. 

Question. What is the impact of the amendment on HDTV and advanced TV? 

Answer. The amendment discourages full HDTV by creating incentives for ad- 
vanced services that use less spectrum than full HDTV. The FcIC has indicated it 
might permit temporary use of^ advanced TV spectrum for ancillary services while 
HDTV developed. Whatever the wisdom of this policy, or of the policy of promoting 
terrestrial HUTV at all, the Tauzin amendment would permit much broader, perma- 
nent use of this spectrum for advanced TV services that do not provide full HDTV. 

Question. What other commercial services are feasible if non-HDTV services are 
permitted on spectrum presently reserved for HDTV? 

Answer. We lack technical expertise sufficient to ofTer a meaningful answer to 
this question. In addition to new Kinds of broadcast and entertainment services that 
new entrepreneurs might suggest, there surely are public safety, land mobile, PCS, 
cellular telephone, data, and other possible uses of this spectrum. It is up to Con- 
gress and/or the FCC to determine whether this spectrum should be limited to ter- 
restrial HDTV. 



251 

Question. How should Congress provide for the licensing of additional spectrum 
to be used for advanced TV? 

Answer. Current law is inademiate. Congress should direct that a new license be 
awarded, competitively, if a broadcaster wishes to commence advanced services with 
additional spectrum. If a second license is awarded for providing advanced TV, the 
original and the new license should each be immediately terminable if all or a por- 
tion of the licensed spectrum is no logger necessary for providing advanced TV. 

Question. How should must-carry apply to advanced TV? 

Answer. Advanced TV should be given must-carry status. All other uses of the 
spectrum should not be awarded must-carry rights. 

Question. Should ancillary services be treated as "broadcasting" under Section 
3(o) of the Communications Act? 

Answer. Reagan-era deregulation has given the FCC too much discretion to deter- 
mine when it will exempt ancillary and pay-TV services from Title HI requirements, 
such as the ones mentioned in the question. Congress should direct that all mass 
media services offered to the general public for free, or for which a charge is made, 
should be regulated as broadcasting. Notwithstanding our views, if any discretion 
to exempt specialized services is considered desirable, it should be carefully delim- 
ited to specialized services that do not impact on the needs of the electorate, or of 
children. 

Question. What is the impact of the amendment on minority and diversity con- 
cerns? 

Answer. While the question is somewhat confusing as to "allocation" of spectrum, 
the underlying thrust is extremely important. As discussed above, the Tauzin 
amendment would eliminate the competition contemplated by the Ashbacker case. 

Question. Should broadcasters be permitted to reduce their broadcast-related 
service? 

Answer. No. As noted above, any spectrum not necessary for broadcast use should 
be made immediately available to others for reassignment on a competitive basis. 
If this approach is not followed. Congress should deny renewal expectancy based on 
any non-broadcast use of spectrum and permit competing applicants offering dif- 
ferent uses of the spectrum to compete, even-up, for the license. 

Question. Would the Tauzin amendment encourage multiplexing of non-HDTV 
signals? 

Answer. Yes. As noted above, the amendment would encourage non-HDTV uses. 
By its terms, the amendment contemplates permitting advanced TV services provid- 
ing less than full-HDTV without consideration of competitive uses. We believe that 
a decision of this magnitude should not be authorized without considerable discus- 
sion. The Tauzin amendment is a blank check. 

Regardless of whether multiplexing or fiall-HDTV is chosen, we strongly reiterate 
that any broadcast-type service should be regulated as broadcasting, and that li- 
censees be chosen competitively. 

Question. What is tne impact of the Tauzin amendment on broadcasters' hours 
of operation? 

Answer. The question highlights just one more shortcoming of the Tauzin amend- 
ment. Based on current regulations, a broadcaster could carry as little as two hours 
per day of "broadcast" service. The amendment would permit broadcasters to reduce 
to that level and devote the remainder of the day to other uses. This further justifies 
our recommendation that broadcasters be limited to providing broadcast service. 
Such a requirement would remove any incentive to exploit public airwaves for other 
uses, to the detriment of broadcast service. 

We trust these responses will assist your endeavors. Please contact us if you have 
any further questions. 
Sincerely, 

Andrew Jay Schwabtzman, 

Executive Director. 

Mr. Schwartzman. Thank you, Senator. I am very sorry that I 
am here today. 

Let me assure you that I am pleased that the subcommittee has 
seen fit to invite me to discuss the broadcasting provisions in S. 
1822, but I am sorry to be here because I regret there is a title VII 
at all. Thus, I urge the subcommittee to drop these sections, and 
consider title VII, if at all, as separate stand-alone legislation in 
the next Congress. 



252 

S. 1822 may be the most important telecommunications measure 
considered by this subcommittee in 60 years. However, title VII is 
not germane to it. The controversy that it is likely to generate 
promises to divert time and attention from the formidable task of 
creating a new national infrastructure for wired telecommuni- 
cations. 

I bow to no one in my support for maintaining free over-the-air 
TV as a vital universal service. Broadcasters do not need this give- 
away to maintain their operations. They are facing no imminent 
harm, certainly not in a week when Broadcasting and Cable maga- 
zine reports that the three major networks are posting their high- 
est collective operating profit in at least 5 years and maybe 20. 

That the broadcasting industry would seek such expansive new 
rights is especially painful for those of us who have long fought for 
must-carry, retransmission consent, syndex, and other measures to 
protect and improve free broadcasting. Our purpose has been to en- 
sure a secure and profitable place for free broadcasting, and to en- 
able new entrepreneurs to enter the industry. This amendment 
would lock up the spectrum only for existing broadcasters and it 
could reduce or even eliminate free TV for millions of Americans. 

Section 701 would require the FCC conduct a rulemaking to mod- 
ify or remove broadcast ownership rules. This is not only a bad pro- 
vision, but it is one which is completely superfluous. 

There is no need for legislation mandating review of FCC broad- 
cast ownership review. That review is underway right now without 
any legislative impetus. It is a matter of record that within days 
of taking office, FCC Chairman Hundt instructed his staff to initi- 
ate a top-to-bottom review of both TV and radio ownership rules in 
the context of two ongoing projects. 

The one aspect of the ownership rules which is not the subject 
of an ongoing inquiry is the Commission's newspaper broadcast 
cross-ownership rules. That is because the Commission operates 
under an appropriations restriction sponsored by Chairman Hol- 
lings which prohibits any modification of these all-important rules. 
Yet section 701 would authorize the FCC to consider that repeal as 
well. 

There is, in short, no good reason to direct the FCC to do essen- 
tially what it already intends to do, and there is absolutely no rea- 
son to place new, utterly unjustified and likely unconstitutional re- 
strictions on the scope and outcome of the inquiry, as S. 1822 at- 
tempts to do. 

Section 701 would change the FCC's time-tested public interest 
principles by substituting a new task that equates broadcasters' 
purported competitive parity with the public's need for diversity. 
That flies in the face of the Supreme Court's Red Lion case, which 
holds that under the first amendment the public's right to receive 
information is paramount, not merely equal to broadcasters' rights 
to operate on publicly owned spectrum. 

Last but not least, Mr. Loewen's praise of localism rings rather 
hypocritical in the face of the language of the proposed statute. It 
bears particular emphasis that section 701 would preclude consid- 
eration of localism in deciding whether ownership rules should be 
deregulated. That would be for the first time, Senator Mathews. 



253 

The so-called spectrum flexibility measure in section 704 would 
promote the substitution of pay-TV for free TV while undermining 
the development of high-definition television. My testimony is di- 
rected as S. 1822, but I need to add that in pressing for even broad- 
er language such as that contained in the House, the industry 
seeks to exploit its monopoly position to get into nonbroadcast busi- 
ness at the expense of the viewers it purports to serve. Although 
it confers on broadcasters twice as much spectrum space as they 
presently control, section 704 creates no new obligations to serve 
the public in exchange. 

What you have been hearing this morning is that broadcasters 
will maintain their service. They are getting twice as much spec- 
trum, and they are going to maintain the same service. 

Although these frequencies have been withheld from willing com- 
petitors, section 704 would condone their use of it for pay-TV pro- 
gramming. This programming would be exempt from equal time. 
Children's Television Act, and other public interest obligations. It 
would favor those paid uses even when there are other applicants 
willing to provide free TV service, and do so even though this 
would also shut out law enforcement, public safety, emergency 
services, and other agencies which have anxiously sought spectrum 
to maintain and improve public service. 

Under section 704, broadcasters need not use this additional 
spectrum for HDTV as had been originally envisioned. Rather, a 
broadcaster could cariy six or more non-HDTV channels, which 
under current law need not conform to any of those public interest 
requirements traditionally imposed on broadcasters. 

All six channels would be under the editorial control of the same 
broadcaster, even if that meant existing cross-ownership rules that 
would otherwise preclude purchase of any additional oroadcaster 
properties would be transgressed. 

It does not have to be that way. You can create six new voices 
and place editorial control in different hands, but that is not what 
section 704 does. It does great harm to the potential for diversity. 
I think it is bad legislation. It is ill-considered. I think it is appro- 
priate to set title VII aside and consider it as stand-alone legisla- 
tion. 

Thank you very much. 

[The prepared statement of Mr. Schwartzman follows:] 

Prepared Statement of Andrew Jay Schwartzman 

I am very sorry that I am here today. 

Let me guickly assure you that I am pleased and gratified that the Subcommittee 
has seen fit to invite me here to discuss the broadcasting provisions contained in 
Title VII of S. 1822. 

The reason I am sorry to be here is that I regret that there is a Title VII at all. 
Thus, I urge the Subcommittee to drop Title VII, and consider it, if at all, as sepa- 
rate stand alone legislation in the next Congress. 

S. 1822 may be the most important and far reaching telecommunications measure 
considered by this Subcommittee in 60 years. While I disagree with some of the 
other parts of S. 1822, its introduction, and likely enactment, is an important ac- 
complishment of which its sponsors should be extremely proud. 

However, Title VII is not germane to this all-important legislation. With but one 
exception, syndicated exclusivity, its proposals are ill-advised and likely to provoke 
considerable opposition. It is likely to become an increasingly controversial sideshow 
which will divert substantial time and attention from the formidable task of creat- 
ing a new national infrastructure for wired teleconmiunications. Unlike the remain- 



254 

der of S. 1822, there is no urgent need to take up the matters addressed in Title 
VII. 

I bow to no one in my support for maintaining free, over-the-air TV. Even as we 
build out broadband networRs, broadcasting promises to be a vital, universal service 
that delivers high quality programming to a mass audience. Competitive cir- 
cumstances will change, but there is no imminent harm facing the industry, cer- 
tainly not in a week when Broadcasting & Cable reports that the three major net- 
works "are heading toward posting their highest collective operating profit in at 
least five years — perhaps more than 20 years." "Reports of Network Deaths Exag- 
gerated," Broadcasting &. Cable, March 14, 1994, page 6. 

TTiat the broadcasting industry would seek such expansive new rights is especially 
painful for those of us who have long fought for must-carry, retransmission consent, 
and other measures to protect and improve free, over-the-air broadcasting. Our pur- 
pose in supporting these policies has been to insure a secure and profitable place 
for free broadcastmg, incuiding new entrepreneurs seeking to enter the industry. 
This amendment would lock up the spectrum for existing broadcasters and could re- 
duce or even eliminate free TV for millions of Americans. 

My testimony addresses the ownership and "Spectrum Flexibility" sections of S. 
1822. While I do not address the syndicated exclusivity aspect of the bill, it is the 
one part which I believe is legitimately implicated by S. 1822, and it is a provision 
whicn I strongly support. 

THERE IS NO NEED TO DIRECT THE FCC TO REVIEW ITS BROADCAST OWNERSHIP RULES 

Section 701 would reauire the FCC to conduct a rulemaking to "modify or remove" 
broadcast ownership rules for radio and television. This is not only a bad provision, 
but it is one which is also completely superfluous. 

This is not to say that legislation is inappropriate where an agency has been ob- 
durate in refusing to keep its rules up to date. But that is hardly the case here. 
Broadcast ownership regulation is an especially inappropriate subject for imposition 
of a stem, almost punitive mandate. 

Review Is Already Underway 

There is-no need at this time for legislation to direct the FCC to review its broad- 
cast ownership rules. That review is well under way, without any legislative impe- 
tus. It is a matter of record that, within days of tEiking office, FCC Chairman Hundt 
instructed his staff to initiate a top-to-bottom review of both TV and radio owner- 
ship rules in the context of two ongoing projects. See, "FCC Takes Look At Broad- 
cast Restrictions," Broadcasting & Cable, December 20, 1993, page 10. 

Radio Rules — The ink is barely dry on the FCC's 1992 decision liberalizing its 
radio ownership rules. At the time the rules were adopted — under the very watcnful 
eves of this Suocommittee and its colleagues in the House of Representatives — the 
FCC committed itself to review the impact of these changes. That review is now well 
advanced. In a recent speech, FCC General Counsel William Kennard said that the 
Commission intends to give close scrutiny to the impact of these changes to decide 
if they were effective and whether they should be retained, repealed or modified. 

TV Rules — ^As the TV ownership rules, the FCC has an active docket looking to- 
wards revision of the TV ownership rule. FCC officials have said that this proceed- 
ing is likely to receive final action before the end of the year; indeed, the mandate 
to initiate a new proceeding might even slow down the process. 

Cross-ownership Rules— ^he one aspect of the FCC broadcast ownership rules 
which is not the subject of an ongoing inquiry is the Commission's newspaper-broad- 
cast cross-ownership rules. That is because the Commission operates under an ap- 
propriations restrictions which prohibits any modification of these all-important 
rules. Yet Section 701 would authorize the FCC to consider their repeal as well. 
This U-turn is something that I would oppose with particular vigor. Speaking frank- 
ly, it is a change which I would not expect to have emanated from this Subcommit- 
tee. 

Section 701 is Overbroad — There is, in short, no good reason to direct the FCC 
to do essentially what it already intends to do. And there is absolutely no reason 
to place new, utterly unjustified, and likely unconstitutional restrictions on the 
scope and outcome of^the inquiry, as S. 1822 attempts to do. 

In light of your long advocacy of diversity and localism, Mr. Chairman, I am con- 
cerned that you may not have fully considered the sweeping change mandated 
under S. 1822. Section 701 changes the time-tested principles the FCC has devel- 
oped under the public interest standard of the Communications Act and substitutes 
a new test which elevates broadcasters' purported need to compete fairly with other 
media providers to full equality with the puolic's need to diversity. This flies in the 
face of the Supreme Court's Red Lion case, which holds that under the First Amend- 



255 

ment, the public's ri^t to receive information is "paramount" — not merely equal — 
to broadcasters' ri^ts to operate on publicly-owned spectrum. 

It bears particular empnasis that Section 701 would preclude consideration of 
whether further deregulation of ownership rules would threaten localism. This is a 
critical goal, and it is inconceivable to me that the Subcommittee would wish to en- 
courage absentee ownership just as broadcasting's inherently local qualities become 
more essential to its long-term survival. 

"SPECTRUM FLEXIBILITY" 

The only positive thing I can say about ownership provision of Section 701 is that 
it is direct and to the point. For better or worse — and I say worse — what you see 
is what you get. 

Section 704, which has the cryptic title "Spectrum Flexibility," does not even 
share Section 701's virtue of clarity. Its pemiciousness is hardly apparent from its 
language. Here again, Mr. Chairman, I fear that the sponsors of S. 1822 may not 
have thought through the dangerous implications of this proposal. 

In exchange for providing a modicum of public service, over-the-air TV has been, 
and remains, a protected and highly profitable business. Section 704 jeopardizes 
that service in many ways. Although it permits the FCC to confer upon broadcasters 
an extraordinary grant of twice as much spectrum space as they presently control, 
the amendment creates no new obligations to serve the public in exchange. Indeed, 
although these frequencies have been withheld from willing competitors. Section 704 
would condone use of them for pay-TV programing whicn would be exempt from 
"equal time," the Children's TV Act, and other public interest obligations. It would 
favor those uses even when there are other applicants willing to provide free TV 
service, and even when those new voices are presently underrepresented in the mar- 
ketplace of ideas. 

Section 704 similarly favors pay-TV even when this would shut out law enforce- 
ment, public safety, emergency services and other agencies which have anxiously 
sought additional spectrum to maintain and improve public service. 

What this is reany about is 6 Mhz of spectrum which has been set aside for high 
definition TV (HDTV). Section 704 would give broadcasters control over this spec- 
truna, m addition to the equivalent amount they presently receive free of charge for 
traditional VHF and UHF TV service. But under Section 704, broadcasters need not 
use this additional spectrum for HDTV, as had originally been envisioned. Rather, 
a broadcaster could carry half a dozen or more non-HDTV channels which under 
current law need not conform to any of the public interest requirements tradition- 
ally imposed on broadcasters. All six channels would be under the editorial control 
of the same broadcaster, and this service could be offered even if existing cross-own- 
ership rules would otherwise preclude purchase of any additional broadcast proper- 
ties. 

Section 704 thus does great harm to the potential for increased diversity. If this 
channel multiplexing were deemed desirable, there is no good reason to pye edi- 
torial control of six or more channels to a single incumbent broadcaster. Because 
these digital transmissions would be in a single indivisible bitstream, the technology 
will likely require that the incumbent licensee be responsible for the actual trans- 
mission, but it is very easy to place control of pro-gram content in other hands, not 
unlike so-called LMA's in use today. (Alternatively, this spectrum could be used for 
a considerable number of traditional TV licenses that could be awarded to minorities 
and other voices presently underrepresented in the mass media.) 

The incentives to do these multi-channel services are so great that they virtually 
insure that we will never have terrestrial HDTV. It may be that HDTV, or terres- 
trial HDTV, is a bad policy choice, but that is not a decision which should be made 
in a 12 line section of an unrelated bill. 

S. 1822 also threatens traditional, so-called NTSC TV service. At least as I read 
it, a broadcaster could reduce hours of operation on the current channel to the cur- 
rent minimum of 2 hours a day and, for the first time, utilize the remainder for 
pay-TV and other services "related to" broadcasting. 

The obscurity of the language in Section 704 necessitates three final observations: 

First, it is extremely uncertain as to just what would be authorized by Section 
704. Its language is so obtuse that virtually every person with whom I have dis- 
cussed it has a different understanding of what it would permit, and what its likely 
impact would be. As a consequence, much of the discussion today and in the future 
is going to consist of arguments in which the participants will be discussing dif- 
ferent things and disagreeing about what Section 704 means rather than its actual 
merits and demerits. 



256 

Second, it is very poor policy to legislate so definitively with respect to technology 
that does not yet exist. Whatever it is that Section 704 does, it is clear that this 
amendment would create new and broadly preclusive rights for incumbent broadcast 
licensees. While I would be skeptical about legislation of that kind at any time, I 
respectfully urge that Section 704 amounts to a blank check made payable to the 
National Association of Broadcasters. 

Finally, Section 704 could have a significant adverse impact on federal revenues 
by disrupting the spectrum auction process newly authorized under Section 309(j) 
01 the Communications Act. I am much less qualified than others to address this 
aspect of the plan, but I believe it is matter that merits close attention of the Sub- 
committee. 

Senator Mathews. Thank you, Mr. Schwartzman. 

Let me thank each of the panelists here today for the presen- 
tations which you have made and the information you have 
brought to this committee. 

Senator Rollings continues to be tied up. He has an opening 
statement which he wished to make. I will take the liberty as 
chairman of making that part of the record. 

[The prepared statement of Senator Rollings follows:] 

Prepared Statement of Senator Hollings 

This morning we continue our series of hearings on S. 1822. the Communications 
Act of 1994. I regret that we have been unable to hold any adoitional hearings since 
March 2 due to the press of business on the Senate floor. 

This morning's hearing will explore two sets of issues contained in S. 1822. First, 
we will consider the provisions of the bill that permit the regional Bell operating 
companies (RBOC's) to engage in manufacturing. These provisions are identical to 
the provisions of S. 173, the Telecommunications Equipment Research and Manu- 
facturing Competition Act of 1991, which I introduced last Congress. S. 173 passed 
the Senate by a vote of 71 to 24, but did not pass the House of Representatives. 
I believe that permitting the RBOC's to engage in manufacturing will help our coun- 
try to retain its leadership position in the international communications manufac- 
turing market. 

After the panel on manufacturing, we will hear from several witnesses about the 
provisions concerning media diversity and broadcasting. S. 1822 encourages more 
flexible regulatory treatment of the broadcast industry to give television and radio 
broadcasters an incentive to develop new services for the consumer. At the same 
time, the bill reaffirms the importance of protecting media diversity. The interests 
of the public remain paramount, and the public must be able to receive information 
from a diversity of media sources. In this regard, S. 1822 requires broadcasters to 
continue to serve the public interest, even as they consider providing new, 
nonprogram services. 

I look forward to the testimony of the witnesses appearing before us today. 

Senator Mathews. When we come to the deliberations we will 
have the benefits of his thoughts on the matter in the record, and 
also the statements by each of you will be a part of the record. 

I want to invite you, if you have additional information that 
comes to your attention that you want to put in either by way of — 
well, additional data, or by